While prospects for physical property markets in Asia are looking bleak for next year, current equity markets valuations have already factored in a significant fall in asset prices and rental levels in 2009, according to Macquarie Research Equities.

Mainly because of valuations, the research arm of Macquarie Securities Group believes it is time for long-term investors to buy property stocks in Asia. After all, listed real estate companies in Asia are trading at an average 45% discount to MacquarieÆs assessed net asset value.

ôThe listed market always leads actual physical asset values and rents. The listed market is telling us that retail, office, and residential prices and rents will fall by 30% to 50% across all asset classes in 2009. This appears a worst case scenario,ö says Matt Nacard, head of regional property research at Macquarie. ôIf the 2009 outcome is any better than that, which we think it will be, the listed stocks are worth buying. We think the worst may be over for listed property stocks.ö

In Hong Kong, MacquarieÆs preferred sub-sector is decentralised retail markets where the firm believes rents will decline by 10% to 15%. Prime retail will be hit harder by a decline in discretionary spending and should decline by 20% to 25%, office markets are expected to come under more pressure and decline by 20% to 30%, while residential prices will soften by 15% to 20%, the firm says.

ôThe short-term bounce and period of outperformance from real estate stocks across the region we have seen recently may continue in the short term. The bounce is likely to be limited to Hong Kong and Singapore though, given risks surrounding smaller countries in Asia and perceived solvency issues in China, Australia and with the smaller JReits,ö says Nacard.

Macquarie prefers developers and real estate investment trusts (Reits) in Hong Kong. In Singapore, Macquarie also prefers Reits.

Investors should be more cautious about smaller Southeast Asian property markets given macroeconomic uncertainties, Nacard says.

MacquarieÆs regional model portfolio aims to have reasonably high concentrated positions in good quality companies with strong balance sheets and well-respected management teams. It also has several smaller stocks, which in some cases are trading at one-tenth of book value, have sound balance sheets and are down 80% in the last 12 months.

Economic growth outlook remains absolutely key for 2009 Nacard says, adding that changes in economic growth expectations and government policy are the two key catalysts that overshadow all others next year.

In Hong Kong, any real estate policy change related to further restricting residential supply could be a moderate driver in 2009, whereas in Singapore, the government may suspend land sales and provide stimulus in February.