Commercial property has traditionally been a strong asset performer with compressed yields and a variety of investment types, from office buildings to shopping centers.
Those who choose to invest in commercial real estate need to understand that there are complexities that influence borrowing capacity.
One key consideration for commercial property investments is the need to understand the "WALE".
What is WALE?
The WALE – or Weighted Average Lease Expiry – measures the average time period in which all leases in a commercial property expire.
It is a key measure for assessing the certainty of rental income streams and is a common assessment tool for commercial property financiers.
Why is WALE important?
Rental income is obviously a large part of the investment return for commercial property, so the WALE result has a direct correlation to the overall value.
The longer the WALE, the more the certainty that the asset's revenue streams are secure and stable well into the future.
Conversely, a short WALE drives uncertainty around the prospects of re-letting, along with the additional costs associated with that process. As a general rule, buildings with a short WALE tend to have a greater level of tenant turnover.
Therefore a longer WALE is generally preferred.
How is WALE calculated?
WALE can be calculated in two different ways. It can be weighted by the rental income (value) or weighted by the amount of lettable area (size).
Example One - Rental Income
For example, in a commercial property of three same sized tenancies with the following remaining lease term as follows:
| Property | Lease Term | Size |
| Commercial Tenant 1 | 6 Years | 225 sq m |
| Commercial Tenant 2 | 4 years | 225 sq m |
| Commercial Tenant 3 | 2 years | 225 sq m |
The WALE in this simple example is 4 years.
Total Years / Number of Tenancies: 12 / 3 = 4.
Example Two - Lettable Area
Here is the more commonly used example based on lettable area:
| Property | Lease Term | Size | % of Area |
| Commercial Tenant 1 | 6 Years | 200 sq m | 25.0% |
| Commercial Tenant 2 | 4 years | 500 sq m | 62.5% |
| Commercial Tenant 3 | 2 years | 100 sq m | 12.5% |
The WALE in this example is calculated as follows:
(0.25 x 6) + (0.625 x 4) + (0.125 x 2) = 4.25 Years
How does WALE link to Property Value?
There is no doubt that the WALE can impact the value of commercial properties. There is detailed commentary on larger examples that can be viewed when looking at listed property trusts for example. Investors are generally prepared to pay a premium for assets with longer WALE's.
An exception for attractiveness on a short WALE might exist in some circumstances. For example, to help reset a lease to a higher rental or to progress the development of a building.
The WALE can be a more material consideration in times when the economic environment is high risk. This can explain the diversity in prices for assets with an otherwise similar profile.
Please reach out for more information about commercial property financing
Contact MCP
1300 510 816 or your Finance Partner
enquiry@mcpfinancial.com.au