The WALE (or weighted average lease expiry) is the way to measure the average time period that all leases in a property will expire. It is a crucial metric used in the commercial real estate industry, particularly in property management and investment analysis.
WALE is important for several reasons:
Lease Term Analysis: WALE provides a snapshot of the average remaining lease term of all leases within a commercial property portfolio. It takes into account the lease durations of all tenants and assigns greater weight to longer-term leases. This information helps property managers and investors understand how long tenants are committed to occupying the space.
Risk Assessment: A longer WALE typically indicates lower leasing risk. If a property has a high WALE, it means that the majority of its tenants are locked into leases for an extended period, reducing the risk of vacancies and potential income disruptions. Conversely, a shorter WALE may indicate higher leasing risk and the potential need for more active leasing efforts.
Investment Decision-Making: Investors and property managers use WALE to assess the attractiveness of a commercial property as an investment. A longer WALE can be seen as a positive attribute because it provides income stability and reduces the need for frequent lease renegotiations. It can make a property more appealing to long-term investors.
Valuation and Financing: WALE can also impact the valuation of a commercial property. Properties with longer WALEs may be valued more highly because they are perceived as less risky. In addition, lenders may offer more favourable financing terms for properties with longer WALEs, as they are considered safer investments.
Strategic Planning: Property managers use WALE to plan for lease expirations and renewals. It helps them develop leasing strategies, such as staggered lease expirations, to minimise potential vacancies and income disruptions. It also aids in budgeting and forecasting rental income.
For commercial property investors, it is a vital calculation that provides insight into potential income or losses. To calculate WALE, you typically sum the remaining lease terms of all leases within a property or portfolio, weighted by the rental income each lease generates. The formula is as follows:
WALE = (Sum of [Remaining Lease Term * Annual Rental Income for Each Lease]) / (Total Annual Rental Income).
| Tenant | Lease Term (Years) | Annual Rent ($) | Weighted Lease Term (Years) |
|---|---|---|---|
| Tenant A | 5 | 50,000 | 5 * 50,000 = 250,000 |
| Tenant B | 3 | 40,000 | 3 * 40,000 = 120,000 |
| Tenant C | 7 | 60,000 | 7 * 60,000 = 420,000 |
| Tenant D | 2 | 35,000 | 2 * 35,000 = 70,000 |
| Total | 860,000 |
To calculate the WALE for this property portfolio:
WALE = (Sum of Weighted Lease Term) / (Total Annual Rental Income) WALE = 860,000 / (50,000 + 40,000 + 60,000 + 35,000) = 860,000 / 185,000 = 4.65 years
In this example, the weighted average lease expiry (WALE) for the property portfolio is approximately 4.65 years. This means that, on average, the leases within this portfolio will expire in about 4.65 years. It provides an indication of the average remaining lease term for the entire portfolio, taking into account the lease durations and rental income generated by each tenant. A higher WALE in this context would signify a lower leasing risk and potentially greater income stability.
Now, this is a tool used by global investors performing their due diligence – the same is true for commercial property managers (or managing agents), who use WALE as a key performance indicator to provide owners with an indication of general stability. It's like an energy star rating of average performance, so to speak.
Your WALE must be over a certain figure, and if you don't meet those criteria you'll have high interest to pay or you won't be able to lend money very easily, or the banks can even call in the credit. The WALE can be majorly important, but that's what the bank does in order to assess whether you're a worthy lendee.
If you own commercial property, you're required to report to the bank on your entire portfolio. I would suggest that if you're thinking of buying that you should consider loading your properties into Re-Leased because it will highlight some potential risks. You can get some really good insights into a portfolio by doing that.
Can the WALE tell the story of an investment?
The WALE takes into account the individual leases of all tenants in a given property. It is typically weighted by the rental income from each lease. But, alternatively, it can be measured by the number of spaces tenants occupy.
For commercial property investors, the WALE can tell a lot of their investment story. In other words, buildings with a short WALE you will find have a high turnover of tenants, and therefore possess higher turnover costs.
Conversely, if a building has a small number of tenancies then, generally speaking, the lower the WALE the higher the risk is posed to potential income streams.
But a short WALE may actually provide a set of opportunities to hit the reset button on a lease by opening up the option to increase rents or make upgrades to a building.
For commercial property landlords looking to sell up, it’s worth noting that the results of a WALE calculation have a direct effect on the value of a property.
So what’s the anatomy of great commercial property investment?
It’s a mix of long-term lease probability, as well as the right tenants. A good strong tenant mix with long-term leases. To be honest, it’s the 'golden eggs' of properties. Those are the things you really need to look out for when looking to invest.
And successful, high-yielding investments have key features in common. These are things that can really only be surfaced through disciplined analysis of each asset’s fundamental characteristics.
High-quality tenants, attractive facilities, an appealing, sought-after location, and a financial analysis that adds up all form part of a sound investment opportunity, and then a WALE score (or WALE calculation) essentially helps to tie everything together.
The main goal of a WALE is to determine the stability and steadiness of a property’s yield while providing good insight into the general health of the property.
The WALE lets you know if you have a strong tenant base, and that’s something the banks look at, too. It’s essentially a credit score for a given building. The only time it [the WALE] doesn't work so well is for single-tenanted buildings. So it's not just only a matter of the higher-the-score-better.
Commercial property investors can also look at the WALE as a health check on how good your property is – it lets you know that if your WALE is low, you are going to be dealing with more turnover. And the other key factor for investors to look out for is yield: that is, the percentage of return you are essentially getting by dividing income by market value.
Click below for more information on WALE and how Re-Leased can help provide real-time portfolio insights
