IMPLICATION OF GOVERNMENT BACKING ON REAL ESTATE COMPANIES PERFORMANCE AND VALUATION

Abstract

The Singapore government has exerted dominant control on the real estate market. Its total investment in the public real estate sector has grown from S$ 3 billion in 2002 to S$ 20 billion in 2015, representing an annual growth rate of 14.6%.

Motivated by increasing research on the costs and benefits of political connection, the capital structure of listed real estate politically connected firms, termed as GLCs are examined across the time period of 2002 to 2015.

Based on a sample of 74 real estate companies, it is established that politically connected firms enjoy a cheaper cost of equity capital controlling for firm performance, corporate governance, and attributes of GLCs. Additionally, when cost of debt is examined, through the direct channel of bond issuance of 287 bonds issued by Real Estate GLCs, politically connected firms are associated with a cheaper cost of debt. The results are robust to the inclusion of alternative proxy, varying bond structures and coupon types of bonds. Contrary to existing studies which found that political connection are valuable only in countries with high corruption, less democratic countries and limited stock market development, this research conducted in the context of Singapore establishes that political benefits accrues even in the absence of political corruption.

Taken together, the findings provide strong evidence that investors require a lower cost of capital for politically connected firms, which suggests that politically connected firms are generally considered less risky than non-connected firms.