Hong Kong property stocks have enjoyed a healthy run this year and according to analysts at Citi Research, the sector could benefit from further upside.
Home prices in the special administrative region's market are among the world's most expensive, with prices more than doubling since 2008 as buyers capitalized on low interest rates, and developers have been reaping the benefits.
Share prices of the city developers have surged in tandem; the industry's stocks are up 19 percent year-to-date on average and hovering at 18-month highs.
"We believe the sector is just at the midpoint of its re-rating run," said Ken Yeung and Oscar Choi, real estate analysts at Citi Research in a note published on Thursday, flagging Henderson Land, Sino Land, SHKP and CKH as their toppicks.
In the note, Yeung and Choi highlighted three main sweet spots set to spur property stocks higher this year.
Firstly, the Hong Kong government's fast-tracking of pre-sale consents by allowing developers to sell property before it's completed, should provide developers with a sales boost, they said. Also, the move by the government to accept lower land premiums, especially for larger sites for fewer bidders, is seen as beneficial for developers.
Finally, the Citi Research analysts said another encouraging factor was the reduced likelihood of further policy restrictions.
In recent years, Hong Kong authorities have rolled out a series of curbs to cool frothy housing prices. In 2012, for example, three new property taxes were rolled out in quick succession, including a 15 percent tax on foreign buyers which was meant to deter speculators from mainland China.
But property prices have continued to defy restrictions, hitting another record high in June. That's prompted speculation that more curbs could be in store, although Citi analysts doubt it will be the case.
"Although home prices have reached record highs, the government will find it difficult to impose more demand-side curbs this time," said the analysts, who argued that end-user demand remained extremely strong.
"Property agencies have told us that 80 percent of the recent transactions were by end-users," the analysts added.
But analysts at research house CLSA have offered an opposite view on the sector, warning investors in a note published this week to take profit on developers.
"There area lot of bad signs. For example, people with the most money are not that interested and the people who are buying lower price properties are moving in, this is usually a red flag," she said.
"This is because the higher end of the market is the smart money – people who have invested multiple times, while at the lower end of the market are much less-experienced home buyers, who are attracted by price cuts. And we all know developers cut prices when the market is weak," she said, noting that this situation last occurred during the global financial crisis.
Denis Ma, head of research at JLL's Hong Kong office, is also cautious on the sector noting that the sale volumes in recent months have been driven by developer discounts.
"There's definitely more talk about heightened policy risk coming through as one thing this government doesn't want to see are rising property prices," he added.
"There is a lot of supply coming on in the second half. So the rally we are seeing at the moment is pent up demand and that's going to run its course and put a bit more pressure in the second half. We see prices falling between 10-15 percent for the full year of 2014," he added.