Hi,
I know this is an old-ish post, but in case you or anyone else is still looking for an answer:
In the following example I am using a heightmap of a terrain, but that should not matter all that much.
This issue might be related to the UE version you are using.
When I try to import this 16 bit PNG:
I get the following results:
[UE 4.26]
Drag and drop the image into the Content Browser and double click it to open the Texture Editor.
Under “Compression Settings” you can select “Grayscale”.
When you now click “Save” this should result in a “G16” image, however in UE 4.26 the result is:
And applied to a landscape it looks like this:
And I have no idea how to fix this.
[UE 4.27 / UE 5.0]
However when using a newer version of UE, without changing the work flow:
The result is the following:
And applied to a landscape the result is this:
This is not really an answer to you question, but I hope it helps.
If I find a way to “fix” the UE 4.26 import I will update this post.