The WALE (or weighted average lease expiry) is the way to measure the average time period that all leases in a property will expire.
But it hasn't always been seen as a highly valued calculation.
That was until the Global Financial Crisis (GFC) hit and universal spending got tighter, which exposed the flaws in loosely defined, month-to-month lease agreements.
Tenant turnover was high, banks were lending hundreds of millions of dollars to dud investment sites, and this lead to a complete revisit of the commercial property investment approach.
What's viewed as a good or bad investment can now be accurately determined by the WALE, providing banks, valuers, and investors with all of the information they need to both lend and invest appropriately.
And furthermore, for commercial property investors, it is a vital calculation that provides insight into potential income or losses.
Well, the WALE indicates when properties, parts of properties or even groups of properties, are likely to be vacant. This term is used by investors, banks and property managers, and valuers.
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.
Former Commercial Property Manager and current Re-Leased Implementation Specialist Kat Byrne say that the WALE is of utmost importance for investors and many successful investments hinge on a good score.
"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," Kat says.
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?
Re-Leased Australasian Managing Director Jana Hood says that 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,” says Jana.
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.
Jana says that 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,” says Jana.
If you are looking to improve your ability to track and optimise your portfolio, our advanced business intelligence tool, CREDIA, could be worth learning more about. View more information about CREDIA or benchmark your performance against our latest rent collection report.
Click below for more information on WALE and how Re-Leased can help provide real-time portfolio insights