Weighted Average Lease Expiry Definition
The WALE duration of REITs differs from the type of tenants to whom they are leased. For example, tenants in the health care niche tend to have a long lease period compared to retail tenants. A phased lease expiry profile means that no more than 30% of the lease must be renewed in a given year. We want to minimize the risk of real estate income falling to zero in a year. For your information, the weighted average breach of lease (WALB)* is defined as the average breach of rent weighted by the principal rent, based on the earlier of the termination dates allowed at the tenant`s choice or the expiry of the lease. So, essentially, it`s just another term for WALE. A property with many leases, different sizes, and different expiration dates One reason for this is that these commercial trusts likely have many small and medium-sized businesses renting out to them. These small tenants are known in the industry as secondary tenants. Due to their size, secondary tenants cannot afford longer rental periods. The “weighted average” is, by definition, a calculation that takes into account the different meanings of the numbers in a data set. Calculation: (lease 1 1,000 m² / total 10,000 m² x 12 months) + (lease 2 5,000 m² / total 10,000 m² x 36 months) + (lease 3 4,000 m² / total 10,000 m² x 48 months) = 38.4 months If, for any reason, a significant tenant decides not to renew their lease with the trust or is unable to pay the payment, This would be detrimental to the ultimate outcome of the trust. In addition, it would be difficult for REIT managers to find a replacement tenant. Note: In the case above, we have weighted the rental terms by zone.
To overcome this limitation, we therefore have the lease expiry profile. Ultimately, a long WALE will be a compelling selling point in any real estate auction or private sale of commercial real estate for rent. As with any investment, you need to assess the risk and return profile of the property against your objectives before making your final decision. It`s just my unprofessional opinion. Please read my disclaimer. The weighted average lease expiration of a property is calculated based on the duration of all leases within the property, but also weighted against individual tenants. This may mean that the WALE is adjusted based on each rental space and its amount inside the property or the contribution of rent payments to the total income of that property. For example, a larger, longer-term rental space can help reduce the risk of several smaller spaces with shorter leases. A WALE (Weighted Average Lease Expiry) is a method of measuring the average period during which all leases on a property or portfolio expire. This term is used by banks, commercial real estate investors and appraisers.
The weighted average lease expiry (or the weighted average of the lease until expiry) is a measure used to measure the risk of vacancy in a real estate portfolio. It is measured in years and is more commonly referred to by its abbreviation WALE. Tenant A occupies 60% of the rental space (the lease expires in 10 years). The size of the tenant can also have a significant impact on the WALE. If a larger tenant contributes more % to a gross rent, the WALE will expire faster as that tenant`s lease approaches. Calculation: (12 months + 36 months + 48 months) / 3 leases = 32.0 months Commercial buildings with a shorter WALE, usually between 1 and 4 years, typically have smaller businesses as tenants that do not commit to rental terms of more than 5 years. The risk of vacancy is higher than that of a property with larger tenants. But commercial properties like these are generally able to experience more robust organic growth through periodic rent increases, which leads to better real estate revenue growth.
Depending on what you, as the owner, plan to do with the property, investors usually look for longer WALES. A weighted average lease term of five years indicates a stable tenant base and high satisfaction. A WALE of just a few years may indicate a shorter turnaround time between tenants, with potential additional costs to manage and minimize these turnarounds. If the rental market is currently declining in the area, a short-term WALE could indicate some risk that part (or parts) of the property will be vacant for some time. It can be much easier to sell commercial properties at a good price if they have a long SALE, and two properties in the same area that are very similar can fetch very different prices if their WALE are radically different. Tenant 1: Occupies 10% of the rental space (the lease expires in 5 years) Tenant 2: Occupies 70% of the rental space (the lease expires in 6 years) Tenant 3: Occupies 20% of the rental space (the lease expires in 3 years) A good lease expiry profile is described as an evenly distributed or “staggered” expiry profile. Commercial real estate investors may have seen the term WALE in real estate sales reports and wondered what this term means. The term WALE stands for “weighted average lease expiration”.
The Property Council of Australia defines a WALE as “the weighted average lease term that remains in a portfolio, it can be weighted by rental income or square metres”. Other abbreviations used are WALT (Weighted Average Lease Term) and WAULT (Weighted Average Unexpired Lease Term). These two abbreviations are more common in America and Britain. The term WALE is generally used for any investment property with 2 or more tenants. The WALE is calculated for all tenants of a property and weighted either by the tenant`s leasable area or by the tenant`s income in relation to the combined total square footage or the income of other tenants. There are 2 factors that can affect the MODEL of an REIT. Generally, the average length of time to the expiration of a lease authority determines the WALE. This means that if you have 20 leases and 80% of them expire in 5 years, your WALE would be longer.
For example, if we look at Sunway REIT`s WALE 2019, we can see that commercial properties have a shorter WALE. Whenever a lease expires on a valuable property, the landlord or REIT can negotiate a better and higher lease. On average typically, each lease also contributes to the final number. The weighted average lease expiration is a measure of the quality of the property`s cash flow: it indicates the predictability of contractually agreed future income. Why it is important to pay attention to the weighted average expiry of the lease As can be seen in this example, tenants who occupy the largest areas of a property and enter into very long leases in the building can strongly distort WALE upwards. That`s why anchor tenants also receive the best rental prices for a REIT or collective real estate investment. The WALE is measured on the remaining lease of all tenants in years and weighted with the tenant`s occupied space or the tenant`s income relative to the combined total square footage or the income of other tenants.