Shares of Chinese property companies are coming down to earth a lot faster than the prices of the apartments they are selling. Somewhere in there may be a buying opportunity.

The Chinese government's measures to rein in the overheating sector are starting to work. Big cities across China have begun to see declines in sales volumes and even prices for residential properties, after a four-year run of steady, mostly uniform price increases. Many Chinese property developers have seen their Hong Kong-listed shares fall more than 40% since the start of November, outstripping declines of 26% on the broader Hang Seng Index.

Analysts say the sharp declines have brought these companies' valuations back down to reasonable levels, making the sector ripe for cautious bargain-hunting. Brokers and analysts in the physical-property market remain optimistic about the overall China property story, pointing to rising wages and waves of mass migration to the country's booming cities, trends unlikely to abate for years.

Those who watch these stocks, like Clifford Lam at Credit Suisse in Hong Kong, are also keeping a positive "overweight" rating on the sector — though he bluntly titled a recent report "Don't Get Too Excited."

One reason for the cautious optimism: The recent success of Beijing's aggressive tightening measures may mean central authorities will hold off on initiatives to curb lending or hold back developers. "We see a very small probability of overtightening in 2008," Tony Tsang, an analyst at Citi Investment Research in Hong Kong, wrote on Jan. 31.

Another positive may be rising inflation, a major concern of authorities and consumers. Current levels could drive more people to buy property as a hedge.

Developers active in the Shanghai area are particularly attractive to analysts, given the robust demand fundamentals there. So are developers with strong balance sheets and access to alternative sources of financing, as equity markets are likely to keep facing head winds this year. Many developers issued shares and debt in recent years to fund aggressive land acquisition, which in turn propped up share prices.

"Much of the rise has been fueled by a virtuous circle of rising residential prices, land prices and equity prices," Robert Fong, an analyst with Merrill Lynch in Hong Kong, wrote late last month. "For a while, it seemed all that developers needed to do was to keep buying more land to fuel a seemingly endless surge in equity prices."

Now, it is a question of which developers will be able to sell their flats and keep cash flowing in. Those with fat wallets will gain even more of an edge in a year that many expect will see a wave of mergers and acquisitions. Conversely, weaker developers could become takeover targets as big players scour for sources of land to develop at low costs.

Two Hong Kong-listed developers that are well capitalized are China Overseas Land & Investment and China Resources Land. Analysts say both are light on debt and should have good sales in 2008. And Shanghai Forte Land is seen as well positioned in its home city. For the three developers, share prices dropped about 40% or more between Nov. 1 and Jan. 22, though all the stocks except Shanghai Forte have since regained some ground.

Analysts say it is generally best to avoid problem areas in southern China, where the Shenzhen and Guangzhou property markets have shown the most serious signs of cooling, even as nearby Hong Kong enjoys high growth. In recent years, prices rose dramatically in the two mainland cities, which depend on retaining big industrial bases.

"The growth there is not very sustainable, and going forward, demand growth for property won't be as aggressive," says Yi Chen, a property analyst for ABN Amro in Hong Kong, who notes that new-home sales in Shenzhen have slowed to fewer than 20 units a day from 200 units not long ago. Home prices dropped about 8% in Shenzhen between September and the end of 2007, while prices in Guangzhou in November fell 9.9% from a month earlier, government figures show.

That is one reason Mr. Chen, who lists China Overseas Land and Shanghai Forte as his strongest recommendations, has a "sell" rating on Guangzhou R&F Properties, a developer with a big presence in both cities. From a Nov. 1 peak of HK$43.40 (US$5.56), its stock tumbled 55% by Jan. 22, to HK$19.22, before recovering a bit. Yesterday, it closed at HK$22.80.

Mr. Tsang of Citi doesn't share the pessimism, arguing that Guangzhou R&F could soon reach its goal of listing on Shanghai's exchange, a move that should boost investor interest in the company.

Still, in general, southern China's weakness reinforces the appeal of the Yangtze River delta, home to Shanghai and second-tier cities Nanjing, Hangzhou and Suzhou. Demand and price growth have been relatively restrained there for several years and only started to take off last year. Property broker Jones Lang LaSalle, suggesting fundamentals in Nanjing are still healthy, notes that land auctions in the provincial capital set records four times in 2007.

Joe Zhang, chief operating officer of Shenzhen Investment, a Hong Kong-listed developer with a major presence in Shenzhen, said recently he remains bullish on that city despite what he estimates is a 20% correction there since September.

Still, his company is hedging its bets, receiving HK$1.2 billion from sales of land and property in Shenzhen and adding exposure in the eastern Yangtze River delta provinces of Jiangsu and Anhui. That could help Shenzhen Investment shore up its battered shares, which fell 55% between Nov. 1 and Jan. 22. The stock closed yesterday at HK$4.19, or 45% below its Nov. 1 level of HK$7.66.