WALE, or weighted average lease expiry, is an important term within the world of commercial property. But what does the term mean, and when should you pay attention to it? If you’re looking to purchase a property with multiple leases, it’s worth finding out.
What’s a WALE?
In a property with various leases of different lengths, assessing market risks can be complex. The weighted average lease expiry is used to indicate the average expiry period of all the leases within a property. This figure enables you to more clearly assess the current and future income stream that the property will provide.
How is the WALE calculated?
A property’s weighted average lease expiry is calculated based on the length of all leases within the property, but it is also weighted in terms of individual tenants. This may mean the WALE is adjusted according to each lease space and how much this accounts for within the property, or how much the rental payments contribute to the whole income from that property. A large leased space with a longer term, for example, may help to mitigate the risk of several small spaces with shorter leases.
Why it’s important to pay attention to the weighted average lease expiry
Depending on what you intend to do with the property as the owner, investors generally look for longer WALEs. A weighted average lease expiry of five years indicates a stable tenant base and high satisfaction. A WALE of just a few years can indicate a shorter turnaround amongst tenants, with extra potential costs involved in managing and minimising those turnarounds. If the rental market is currently on a downswing in the area, then a short-term WALE could indicate some risk that part (or multiple parts) of the property could lie vacant for some time. It can be significantly easier to sell commercial property for a good price if it has a lengthy WALE, and two properties in the same area that are very alike can fetch very different prices if their WALEs are drastically different.
When is a shorter WALE a good thing?
It’s not all bad news if the WALE is a shorter term. If you’re looking to upgrade or add to the property in the next few years, shorter leases can actually provide the chance to make improvements, renegotiate lease agreements and position that property within in a higher rental return bracket.
Ultimately a long WALE is going to be a compelling selling point in any property auction or private sale of commercial properties for lease. As with any investment, you will want to assess the property’s risk and return profile against your objectives before making your final decision.