The housing supply shortage may spark a rally in the city's residential market in the fourth quarter, said Merrill Lynch, recommending investors to buy shares of local leading developers.

The financial investment management firm also forecast a 10 to 20 percent rise in property price this year given that the GDP grows 5 to 6 percent and mortgage rate stays low at 2.75 percent.

Merrill Lynch revised down its annual forecasts on housing supply for 2008 to 2010 after reviewing the latest development schedules. The average number comes down to 9,000 to 10,000 units from 10,000 to 11,000 units, compared with an annual average of 21,591 units from 1997 to 2007.

The forecasts lagged behind the government's estimates of 10,980 new completions in 2008 and 12,670 in 2009. The Transport and Housing Bureau is due to release housing supply statistics by the end of the first half today.

"The housing shortage for 2008 to 2010 is mainly due to developers' strategy of spreading their land bank over a longer period of time, given the limited land supply," Merrill Lynch's analysts said in a research note yesterday. It expects major developers to complete only 8,163 units in 2008.

The SAR government, MTR Corporation and Urban Renewal Authority together have provided plots of land for development of 1,819 units year-to-date, 60 percent lower than the corresponding period in 2007, the research note said.

Even if there is a slowdown in demand as a result of the macro-environment, Merrill Lynch said it is unlikely to ease the tension in supply. It pointed out the annual take-up for 1997 to 2007 amounted to 20,185 units, the market was able to take up 13,050 units in 1998 under sluggish momentum and high mortgage rates.

Some major residential projects will be launched in late third quarter or early fourth, such as Sung Hung Kai Properties(SHKP)'s Cullinan on Kowloon station, Sino Land's Lake W in Ma On Shan and New World Development's Hanoi Road.

The problem of acute housing shortage will become more apparent toward the end of the year, and Merrill Lynch expects a rally in the fourth quarter.

"Trading in an average of 36 percent discount to 2008 NAV (net asset value) compared with 16 percent historical average, investors should start to position for a potential rally in the fourth quarter," according to the research note, recommending SHKP, Cheung Kong and Sino Land.

For Cheung Kong, Merrill Lynch estimates NAV at HK$154.90 per share in 2008, compared with yesterday's closing price of HK$104.90.

SHKP rose 1.48 percent to close at HK$109.90 yesterday, the NAV estimate is HK$164.90. Sino Land, with a NAV estimate of HK$22.83 per share, closed at HK$14.46.

(HK Edition 07/18/2008 page3)