Investing in assets with limited lifespans requires a different framework.
An investor’s choice
Consider an investor who is faced with the following choices:
Choice A: He can buy a freehold property A for $1 million that has an open market rent of $100,000 annually.
Choice B: He can buy a leasehold property B for $500,000 that has an open market rent of $100,000. There is only 3 years left on the lease.
Based on conventional valuation metrics, property A has a P/E of 10x while property B has a P/E of 5x. However, an investor who chooses property B over property A would have just committed himself to a $200,000 loss. This illustrates the importance of asset lifespan.
Common industries with limited life assets
Companies with concession- or licensing-based business models are the most relevant. These are often infrastructure businesses. Companies with operations in China are also more likely to …