Which is the better approach to initialize php properties?

In your example, the second method is highly risky. If you give the variable name as an argument, you basically give the code the access to set all private variables from outside the class. What is the point of having private variables if you allow them to be set freely like that?

Additionally, the point of encapsulation in OOP, is that the inner workings of a class are not transparent to the code outside the class. Your second method breaks this encapsulation and thus part of the point of OOP, as the code outside the class has to be aware of the inner workings of the class, like the name of the variables. What happens if you later choose to change the variable names? All the code breaks. If they were accessed via setters/getters, old functions could be changed to reflect changes inside the class, but code outside the class would be difficult to change. In addition to that, the second method makes the validation of the values hard.

You should use the first method, especially if setting the class variables is necessary for operation. However, if you feel that some default values can be allowed for the attributes, you can just take advantage of PHP's default argument values like:

class Test {
    private $var1;
    private $var2;

    public function Test($var1 = 'defaultValue', $var1 = 'defaultValue') {
        $this->var1 = $var1;
        $this->var2 = $var2;
    }
}
$objTest = new Test();

Anyway, if the values must be initialized by the code, then you should definitely force them to be passed in the constructor. If default values are allowed, then either initialize the values in constructor with separate setters for the variables or just default argument values like in the provided example. It is, however, bad practice to expect the code to set critical values via setters after the constructor has been called.

I wonder why you have defined your variables as private in the first place. Private members exist for the class itself rather than for use through a public interface. It may be keeping track of some value, which a magic setter method (__set) can change, at any time in the program, as you have it in your second example. If you need your variables to be private (for class only access) then a constructor function __construct($var1,$var2) or __construct($var1="defaultvalue",$var2="defaultvalue"), so in keeping with your first example.

It would depend on your anticipated states, which you would have planned in state/activtiy diagrams.

Hope that helps

If those variables are necessary for the operation of the class, you would beter use the first method. That way you can ensure they are set when the class is created.