Steel and building material stocks are likely to offer attractive opportunities given their current low valuations despite the government's clampdown on the real estate sector to curb soaring property prices, Morgan Stanley China Strategist Jerry Lou said on Thursday.

"We are mid- to long-term bullish on steel and building material shares which we think are significantly undervalued," said Lou, who has upgraded the shares from underweight to overweight in Morgan Stanley's China portfolio.

"Now the question is when to enter the market. We think the turning point has not emerged but it is apparently close to the bottom," he said.

Despite the government's policy tightening to curb property speculation, Lou said that upstream industries related to the real estate sector will continue to benefit from China's massive project to build affordable housing and the rapid urbanization process in the long term.

"The housing price is not necessarily a barometer of the Chinese economy. You can never underestimate how a fall in housing prices would help boost the country's consumption and investment potential," he said.

However, investor concern over the government's further tightening including the launch of a property tax has cast a shadow on the market, which is facing the likelihood of further declines.

It has been reported that China's top economic planner, the National Development and Reform Commission, is studying a possible nationwide property tax and it could expand the tax, which is now levied on commercial property, to cover the residential sector. Recent media reports said that Shanghai is expected to impose the tax on a trial basis as early as next month.

"So far, the impact of a property tax has yet to be fully digested by the market. If it becomes a sure thing, the market will see further declines," Lou said.

The benchmark Shanghai Composite Index declined 0.7 percent on Thursday to close at 2552.66, the lowest since April 30, 2009, on concern that banks' fundraising and government efforts to cool the nation's property market will hurt shareholders' stakes and dent demand for resources.

The Chinese stock market has been among one of the world's worst performers after slumping 22 percent this year as investors worried that growth in the world's third-largest economy would slow as the housing market cools and Europe's debt crisis threatens China's exports.