Hong Kong's real estate stocks rallied by around 30% since January

It outpaced Hang Seng Index's 5% performance.

The Hang Seng Property Index has some room to rally in the near-term amid a temporary stabilisation in residential house prices. However, BMI Research believes that there is still plenty of downside left in the Special Administrative Region's property market due to headwinds from extremely stretched valuations, and impending housing supply amid the regulator's macroprudential measures.

A further decline in real estate prices will eventually weigh on property equities over the longer term. Hong Kong real estate equities (as measured by the Hang Seng Property Index) have rallied by approximately 30% since the start of 2016, outperforming the Hang Seng Index's performance of just 5%.

Here's more from BMI Research:

We believe that there is still some room for the index to head higher in the short-term amid a temporary stabilisation in the territory's residential property prices. Indeed, data from Hong Kong's Rating and Valuation Department showed that private domestic home prices for selected popular developments rose by 0.6% q-o-q in Q216, marking a pause from two straight quarters of contraction.

Meanwhile, the property equity index is trading at 0.8x price-to-book ratio, which is well below its long-term average of 1.1x. Given that such a valuation is close to the lows seen respectively during 2003, 2008, and 2014, this suggests that investors could be taking advantage of extremely cheap valuations.