It’s the question being asked by many investors given the current heightened focus on long term, secure income streams.
In order to put some metrics behind it, CBRE Research has issued a new Viewpoint report examining the influence that a long Weighted Average Lease Expiry profile has on commercial property pricing.
The research was inspired by observations of around 175 office transactions since 2005 spread across six capital city markets. CBRE’s modelling incorporated almost ten thousand discounted cash flow models using 16 years of office data from these markets.
CBRE Research Associate Director Bradley Speers said the modelling indicated that everything else being equal, a prime office asset with a 12-year WALE would trade at a yield 14% below the same prime office asset with a five-year WALE.
Conversely, a shorter WALE asset would trade at a yield 5% above the same asset with five-year WALE.
“The results of the data corroborate with observed transaction pricing and confirm that there is a clear downward bias in pricing versus WALE,” Mr Speers said.
“Most prime assets offering a WALE of greater than eight years trading on yields below the market average. This becomes more significant for assets with a 10-year WALE and increases markedly for assets with 11 and 12 year WALEs, reaching 10% and 14% respectively.”
CBRE Executive Managing Director Scott Gray-Spencer said the research confirmed that investors were willing to pay a premium for reduced risk.
“In this current low-yield, low-growth environment, investors have shown a keen interest in the security and fixed income growth inherent in commercial properties with a long lease expiry profile,” Mr Gray-Spencer said.
“This is particularly the case for properties with WALE’s of over 10 years, with investors prepared to accept a lower return to secure a long term income stream.”
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