What is a white elephant?
A white elephant is an item or entity whose maintenance expenses are disproportionate to its utility or worth. From an investment standpoint, the term refers to an asset, property, or business whose operation and maintenance costs are so high that it is exceedingly challenging to generate a profit.
Additionally, white elephants are typically illiquid assets, which means they cannot be sold for cash without incurring a substantial loss for the vendor.
Comprehension of White Elephants
A white elephant constitutes an onerous possession. It can define anything costly to maintain, unprofitable, and unsellable in the context of investments. Alternatively, undesirable assets that cause more trouble than they solve are called “white elephants.”
Financial institutions may allocate capital towards property, plant, and equipment (PP&E) to generate future profits by utilizing these fixed assets. However, if economic conditions were to change, these assets might become white elephants. Consider a scenario where a business constructs a factory to satisfy the expected demand for a new product line. If the product fails to generate sales, the newly established factory transforms into a costly asset that fails to contribute sufficient revenue to the company’s maintenance expenses.
The white elephant has been associated with numerous government-funded construction initiatives over time. By investing substantial sums of money in subsidized construction and infrastructure projects, governments anticipate that these initiatives will increase economic growth.
Funding for such initiatives in the United States occasionally encounters contentious earmarks, which are spending provisions inserted into legislation to allocate funds for a specific project favored by a government official or politician. According to their detractors, white elephant initiatives are often deemed ill-conceived, inadequately planned, and a squander of taxpayer funds.
An Overview of White Elephants
The origin of the word “white elephant” is Asia. The white elephant originated in Siam, presently referred to as Thailand. During ancient times, these uncommon creatures were considered sacred and were bestowed automatically upon the governing monarch.
As the legend goes, the monarch would bestow good fortune or misfortune as a white elephant. To assist with the elephant’s cost, if he favored the recipient, he would donate land in addition to the elephant. He would omit the land from the gift if he did not like you, transforming it into a money sinkhole.
Illustrations of White Elephants
Real estate is rife with white elephants, as the subsequent instances demonstrate:
The Empire State Structure
An instance of a property that was once regarded as doomed to remain a white elephant but subsequently evolved into a generator of positive cash flow and expansion is the Empire State Building. The property’s profitability occurred in the 1950s, over two decades after its completion. Constructed amidst the economic downturn of the Great Depression, the edifice encountered considerable difficulty in fulfilling its intended function as an office space.
Currently, under the ownership of a real estate investment trust (REIT), the structure generates income from various sources. The building’s observation deck contributed approximately 39% of the structure’s total revenue in 2019, or $128.8 million.1In addition to rental income from retail and office spaces, the building receives financial support from third-party television and radio broadcasters through fees collected for the utilization of its broadcasting mast.
T-Mobile Center establishment
The city of Kansas City, Missouri, owns the T-Mobile Center (formerly known as the Sprint Center), which serves as another illustration. The inaugural performance of the multipurpose arena took place in 2007, featuring a performance by Elton John.
The T-Mobile Center, which spent approximately $276 million on it, was initially intended to host a prominent sports anchor team.2Kansas City did engage in discussions with teams from the National Hockey League and the National Basketball Association. Neither league, however, has agreed to relocate to the arena as of 2020.
The Hotel Ryugyong
In conclusion, the Ryugyong Hotel is present. Established with the initial intention of accommodating more than 3,000 hotel rooms and five revolving restaurants, the Ryugyong Hotel in Pyongyang, North Korea, is a pyramid-shaped skyscraper boasting an impressive height of 105 stories.
In 1992, due to a shortage of funds, construction on the tallest structure in North Korea was suspended, although it had been initiated by developers in 1987. Subsequently, construction on the tower recommenced in 2008, anticipating it would be inaugurated on the centennial of Kim Il-Sung’s birth in 2012.
As of 2020, the structure is still incomplete, garnering the moniker “hotel of doom” and the questionable distinction of being the tallest unfinished structure globally.
Conclusion
- A white elephant is an investment, property, or burdensome asset whose maintenance expenses are disproportionate to its worth or utility.
- Old Thai custom dictated that the reigning monarch receive uncommon, expensive-to-maintain white elephants as a gift; hence, the term’s origin.
- It currently needs to be more frequently linked to unprofitable real estate.
- Frequently, these assets are illiquid, meaning their proprietors can only sell them without incurring a significant loss.
