ECM Libra Investment Research has kept its "underweight" call on property stocks as rising construction costs erode developers' margins. The recent fuel hike may dampen property sales and add further pressures on builders.

"We are cautiously calling an underweight now in view of negative outlook in the near term due to escalating construction costs," the broker said in a report.

Although there is bargain-hunting opportunity now, it warns that both earnings and share prices of property companies may drop further.

However, in the mid to long term, developers with prime land bank that focus on upper middle class to high-end properties will be able to pass on cost to home buyers, it said.

ECM Libra said investors can consider buying shares of selected property players, as their share prices have fallen significantly so far this year and very much at distressed levels as compared with the intrinsic value of their landbank.

The broker has YNH Property as its stock pick, saying that its high development margin and prime landbank will put it in a better position to overcome cost escalation.

Despite weakening market, property prices may continue to rise especially for the higher end products as developers seek to defray higher construction costs. However, developers that locked in sales value by pre-selling their properties may face margin erosion even when fixed price building contracts have been given out earlier, ECM Libra said.

Developers may be "forced" to re-negotiate building contracts to avoid contractors delay or abandon the projects because of the high building material prices.

"We expect developers to scale down or defer launches in order not to 'over-expose' themselves to the spiralling construction costs," the report said.