Article:

Political Risk and the Cost of Capital in Asia-Pacific Property Markets

Author: George D. Cashman, David M. Harrison, Hainan Sheng

Start Page: 331
End Page: 364
Volume: 18
Issue Number: 3
Year: 2015
Publication: International Real Estate Review

Abstract:

This study investigates the impact of political risk on the cost of capital for publicly traded real estate firms. More specifically, by using a sample of 102 REITs and listed property trusts, which hold nearly 6,000 distinct investment properties across the Asia-Pacific region, we find strong empirical evidence that increased exposure to political risk increases both the cost of equity financing of a firm and its weighted average cost of capital. Interestingly, no such linkages are apparent between political risk and the cost of debt of a firm. These empirical results are robust to a variety of alternative measures of political risk, including a: 1) political rights index, 2) political change index, and 3) corruption perceptions index.

Keywords

political risk; cost of capital; REITs and listed property trusts; international real estate