We’re not talking about a large seafaring mammal but the Weighted Average Lease Expiry, which is a term that is more commonly seen its abbreviation - WALE.
Why is WALE so important to you as a commercial property investor? As you know, vacancy is a big problem for any investor so knowing how to calculate any vacancy period is a great tool to reduce your risk. A WALE is used to measure the overall vacancy risk of a property with multiple tenants and is used by investors to assess the likelihood of a property becoming vacant.
In other parts of the world, a WALE may be also referred to as WALT (Weighted Average Lease Term) and WAULT (Weighted Average Unexpired Lease Term) but they practically refer to the same concept. In the Asia Pacific region, investors are more accustomed to WALE.
How do you calculate the WALE on your investments?
The WALE is measured across your tenants remaining lease in years and is weighted with either
1. the tenants occupied area or
2. the tenants income against the total combined area or
3. the income of all the tenants.
Tenant 1 occupies 50% of rentable area and lease expired in 5 years
Tenant 2 occupies 20% of rentable area and lease expired in 6 years
Tenant 3 occupies 30% of rentable area and lease expired in 2 years
Therefore, the WALE for this property is calculated as:
(0.5 x 5) + (0.2 x 6) + (0.3 x 2) = 4.3 years
As with this example, Tenants that occupy the larger spaces AND sign on for a longer lease in the building can skew the WALE calculation upwards. This is why your anchor tenants ( or larger Tenants like government organisations or stable companies) may receive the best rental rates in a collective property investment.
WALE can be measured in terms of revenue from the building in place of rentable area. However, the majority of financial reporting of your commercial properties typically list ‘securities’ or ‘rentable areas used’. A WALE is a great measure of your investment’s risk and potential for income. Properties with a long WALE face the least risk of vacancy; for this reason, most investors believe that the larger the WALE the better.
Know your investment objectives:
If your investment goals are to have a predictable and stable income, then properties with a longer WALE may be just the ticket. Measuring the WALE on your properties is a good way to measure your investment against your goals and have greater peace of mind with new investments.