When is a WALE not a whale?
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A WALE – or weighted average lease expiry – is not a marine mammal but a common and important term in the world of commercial property.
The WALE is a way of measuring the average time period in which all leases in a property will expire.
It’s a vital piece of information as it indicates when properties, parts of properties or groups of properties, are likely to fall vacant.
Why the WALE is important
DEXUS Property Group General Manager, Research, Peter Studley says the WALE is an extremely important measure for owners and investors of commercial property.
“Leases provide the secure income streams which make up a large part of the investment return for commercial property, so the length of those leases help underpin the value,” Studley says.
“For example a long WALE of five years or more indicates that income streams from the asset are secure well into the future.
A long WALE of five years or more indicates income streams are secure well into the future.
“On the other hand, a short WALE of one to three years indicates a greater rollover of leases in the short term where leases expire and tenants make decisions about whether to stay or move.”
What does it calculate?
When WALE is calculated it takes into account the leases of all tenants in a property. It is usually weighted by the rental income from each lease but can also be weighted by the amount of space or square metres tenants rent.
For investors, a longer WALE is often preferable as it indicates that vacancies are less likely to be a short-term issue.
The WALE story for investors
Studley says the WALE can tell an investor much about the characteristics of their investment.
“Buildings with a short WALE tend to have a high turnover of tenants, which can lead to greater management and leasing costs,” he says.
“The length of the WALE also indicates when a building might be exposed to market risk as leases expire or need to be renegotiated.
Buildings with a short WALE tend to have a high turnover of tenants.
“If buildings have a small number of tenancies then generally speaking the lower the WALE the more risk there is to the current income stream. However, a short WALE may also provide opportunities to reset a lease to a higher rent or upgrade and reposition a building.”
WALE and property values
But the WALE does more than indicate stability of tenants – it can also affect the value of buildings.
Studley says investors are generally prepared to pay more for buildings with long WALEs.
“This outcome has been most pronounced at times when the economy has been volatile and investors have been cautious about market risk,” he says.
“Consequently the WALE is a useful metric for investors or valuers in understanding the pricing of transactions and why similar buildings achieve different sale outcomes based on the length of their WALE.”