What Is a White Elephant?

A white elephant is something whose cost of upkeep is not in line with its usefulness or value. From an investment perspective, the term refers to an asset, property, or business that is so expensive to operate and maintain that it is extremely difficult to actually make a profit from it.

Key Takeaways

  • A white elephant is a burdensome possession whose cost of upkeep is not in line with its usefulness or value.
  • The term derives from the old Thai custom of gifting rare, expensive to keep white elephants to the reigning monarch.
  • Nowadays it is often associated with unprofitable real estate.

Understanding White Elephants

A white elephant is a burdensome possession. When applied to investments, it can be used to describe anything that is expensive to maintain, unprofitable, and impossible to sell. In other words, white elephant is the name given to undesirable investments that are more trouble than they are worth.

Over the years, the term white elephant has often been linked to real estate. At times, it is also associated with the so-called Asian growth model. China, slightly mirroring similar, previous endeavors from Japan, generated rapid economic growth by funneling lots of money into state-led infrastructure investments and export expansion. Manufacturers were subsidized, interest rates were kept low, and exchange rates were pegged back to make domestic goods cheaper to buy from overseas and imports expensive.

Costly mercantilism policies delivered booms but also a dependency on continuous investment. With time, excess expenditures culminated in the misallocation of capital and various asset bubbles.

Economists calculate that roughly 45% of Chinese gross domestic product (GDP) is based on investment, a much larger figure than developed economies. Furthermore, skeptics point out that nearly half of that investment has been wasted on white elephant projects, including ghost cities, that generate pretty much zero returns.

History of White Elephant

Incidentally, the term white elephant derives from Asia. The white elephant is an icon with roots in Siam, now commonly known as Thailand. These rare animals were regarded as holy in ancient times and automatically gifted to the reigning monarch.

The story goes that the monarch would give the white elephant as a gift of either good or bad fortune. If he liked the recipient, he would gift land along with the elephant to help pay for the cost of the elephant. If he did not like you, he would not include land, turning the gift into a money pit.

Examples of White Elephants

White elephants are common in real estate, including in the following examples:

The Empire State Building

The Empire State Building did not become profitable until the 1950s, more than 20 years after it was completed. Built against the backdrop of the Great Depression, the building has never truly been an office building, despite being planned for that purpose.

In 2006, the rent was just $37 per square foot, significantly below midtown New York’s average rental rate of $48 per square foot. Nevertheless, vacancy rates still stood at 18%.

The Sprint Center

A more recent example is the Sprint Center owned by Kansas City. The multi-purpose arena opened in 2007, hosting a concert by Elton John as its first event.

At a cost of roughly $300 million, the Sprint Center was supposed to house a major sports anchor team. Kansas City did enter discussions with National Basketball Association and National Hockey League teams. However, until now, none of them have agreed to relocate to the arena.

The Ryugyong Hotel

Finally, there’s the Ryugyong Hotel. Originally intended to hold five revolving restaurants and over 3,000 hotel rooms, the Ryugyong Hotel stands 105 stories tall as a pyramid-shaped skyscraper in Pyongyang, North Korea.

Developers began construction on the tallest structure in North Korea in 1987, but plans were later halted in 1992 due to a lack of funds. Eventually, in 2008, building work resumed, with a view to unveil its grand opening in 2012, the centenary of Kim Il-Sung's birth.

As of 2019, the building still somehow remains unfinished, earning it the nickname the "hotel of doom" and the dubious distinction as the tallest unfinished building in the world.