PROPERTY developer stocks are severely underrated and should be valued on an earnings per share basis, says a new report by Salomon Brothers. The report, by analysts Franklin Lam and George Kee, said: ''The Hong Kong residential property sector is buttressed by structural and stable economic and social factors, which make property a much lower-risk investment than the market believes. ''Therefore, most developers' stocks should not trade at their current steep discounts to net asset values (NAVs).'' The report said that apart from high prices, the Hong Kong market shared none of the symptoms endemic in property bubble scenarios seen elsewhere in the world. ''The firm strongly rebuts the widespread scepticism over the continued strength in residential prices and the perception that the Hong Kong housing market is a property bubble,'' it said. ''Unlike the associated factors to the property price escalation that occurred overseas, the rise in Hong Kong's property prices has not been accompanied by loose credit, over-gearing, excessive building by developers or an overdose of speculation.'' Salomon said the scheduled completion of a number of large housing estates towards the end of this year meant there was little chance of a speculation overdose. The extra supply would lead to higher vacancies and did not paint a fair picture of the strength in take-up. The investment bank forecast a 57 per cent rise in demand for housing units between 1991 and 2011. ''With this consistency in demand, we believe that developers' stocks should be valued on the basis of earnings multiples rather than NAVs, which are limited by the size of the companies' current land banks,'' the report said. It said that since demand for new housing in the territory should remain strong for at least 18 more years, developers' stocks were heavily underrated on their current multiples of about 8.5 times. ''We believe that the main driving force behind sustained growth in Hong Kong residential prices is the rising incomes of young families that reside in this entrepot, whose prosperity should continue as China's economy develops further. ''We view allegations that the territory's high housing prices are the product of rampant speculation as a minor issue,'' the analysts said. ''In the long term, few factors, including stricter mortgage rules, will suppress new housing demand or prevent a prospective homeowner from buying.'' Salomon said its favoured stocks in this sub-sector were Hang Lung Development and New World Development which had 90 per cent of expected 1994 development profits already locked in by property pre-sales. The bank also tipped Hong Kong Realty and Trust Co, whose shares it said were being traded at a steep discount to NAV despite the company's well-located land bank and quality management. The difficulty in sourcing quality sites for housing development and the high cost of land combined to form a formidable barrier for companies aiming to become recurrent property developers in Hong Kong. Hong Kong Realty, for instance, has re-entered the market by making purchases at government land auctions since 1989, spending about $6.8 billion, or 117 per cent of its market capitalisation, to build up a large enough land bank to produce new housingdevelopments on a recurrent basis. Salomon said: ''In our view, this high entrance barrier is one reason for rating the recurrent developers on a price-earnings basis.''