What you didn't know about Hong Kong during the Asian Crisis, 2008 Credit Crisis

Developer trading was shockingly pricey.

Barclays has described its framework for dealing with unexpected events, in case of emergencies, as many investors start to head off to their summer holidays. While it has advised focus on fundamentals during shocks, it believes a second counter-intuitive aspect to focus on is valuations.

According to a research note from Barclays, in the event of a shock, responses from the market would likely include stress testing and scenarios analysis. Investors would also rightly run through various cap rates, rental decline and NAV discount scenarios, Barclays said.

It noted that as shares have the potential to move very quickly, it believes these exercises are likely to be more helpful in identifying potential entry points rather than exit points.

The report also said that, just like with fundamentals, valuations going into the crisis are likely to dictate what the recovery will look like.

Here's more from Barclays:

Looking back to the three major shocks, we find that from a valuation angle, the Hong Kong property stocks entered the Asian Crisis and the 2008 Credit Crisis on fairly stretched valuations.

In June of 1997, the Hong Kong developers and landlords were trading at 1.32x and 0.91x trailing P/Bs, 36% and 20% more expensive than the long run historical average. Similarly, back in June 2008, the Hong Kong developers, landlords and REITS were trading at trailing P/Bs that were 28%, 12% and 23% higher than the historical averages.

The 2003 SARS episode was different. As the property market had already been in a six year downturn, valuations were undemanding. The developers and landlords were trading at 0.58x and 0.56x trailing P/B, 41% and 26% below their long-term averages.

This brings us to the current snapshot. The good news is that while the physical valuation is as stretched as 1997, property stocks’ valuation is much more reasonable. As a group, the developers, landlords and REITs are currently trading at 0.70x, 0.62x and 0.73x trailing price to book, respectively.

Although this is not as cheap as the run up to SARS, current P/Bs are some 12%-25% below the long-run average levels.