When you are looking to finance a commercial property purchase with multiple tenancies you will need to know about the 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 it important?
The WALE indicates when properties (whether assessed in parts or groups of properties) are likely to be at the conclusion of a lease.
The rental income obviously make up 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 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 too, buildings with a short WALE tend to have a greater level of tenant turnover.
So a longer WALE is generally preferred.
How is it 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).
For example, in a commercial property of three same sized tenancies with the following remaining lease term as follows:
| Property | Lease Term | Size |
| Commercial 1 | 6 Years | 225 sq m |
| Commercial 2 | 4 years | 225 sq m |
| Commercial 3 | 2 years | 225 sq m |
The WALE in this simple example is 4 years.
Here is the more commonly used example based on lettable area:
| Property | Lease Term | Size | % of Area |
| Commercial 1 | 6 Years | 200 sq m | 25.0% |
| Commercial 2 | 4 years | 500 sq m | 62.5% |
| Commercial 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 circusmtances. For example, to help reset a lease to a higher rental, or to progress the development of a building.
The WALE can also be a more material consideration in times when the economic environment is high risk. This can also explain the diversity in prices for assets with an otherwise similar profile.