DCF analysis for multi-tenant investment property in Luxembourg
The Discounted Cash Flow (DCF) method is the benchmark approach for valuing multi-tenant investment properties. It projects all net cash flows generated by the building over a defined analysis period (typically 10 years) and discounts them at a rate reflecting the investment risk.
In Luxembourg, DCF is particularly relevant for office buildings (Kirchberg, Cloche d'Or, Gare Centrale), mixed-use properties and residential rentals. Institutional investors (SIF/RAIF real estate funds regulated by the CSSF) systematically use this method for their INREV reporting and acquisition due diligence.
The DCF value breaks down into two components: the present value of net income received during the analysis period, and the discounted terminal value (estimated resale price at the end of the period). The terminal value typically represents 50 to 70% of the total value, underscoring the importance of the exit cap rate selection.
Lease-by-lease analysis: rent, indexation and vacancy
Our multi-tenant DCF tool models each lease individually, enabling granular analysis of the rent roll:
- Contractual rent: the in-place rent is projected until lease expiry, with contractual indexation applied. In Luxembourg, most commercial leases provide for annual indexation based on the consumer price index (IPCN) published by STATEC.
- Break option: if the lease includes an early termination option, the model incorporates a non-renewal probability that generates a potential vacancy cash flow.
- Estimated Rental Value (ERV): upon each lease expiry, the rent is rebased to the estimated market rent. The gap between in-place rent and ERV (reversionary potential) is a key indicator of income under- or over-valuation.
- Structural vacancy: a vacancy rate is applied to the ERV for reletting periods. In Luxembourg, office vacancy in Luxembourg City was approximately 3.5% in early 2025 (source: JLL Luxembourg).
- Rent-free and fit-out: rent-free periods and tenant fit-out contributions are modelled as negative cash flows in the renewal year.
Discount rate and exit cap rate
The choice of rates is critical to the DCF valuation result:
- Discount rate: reflects the return required by the investor given the risk. In Luxembourg, discount rates for prime offices range between 5.5% and 6.5% (2025). For residential, they range from 4.5% to 5.5%. These rates are derived using the build-up method: risk-free rate (10-year government bond) + real estate risk premium + liquidity premium + specific premium.
- Exit cap rate: determines the resale value at the end of the analysis period. It is generally 25 to 50 basis points higher than the initial rate to reflect building ageing. Prime office cap rates in Luxembourg-Kirchberg stood at 4.25% in early 2025 (CBRE).
- Sensitivity: a 25 bps change in the discount rate can alter the value by 3 to 5%. It is essential to perform a cross-sensitivity analysis (discount rate x exit rate) to calibrate the value range.
IRR (Internal Rate of Return) and sensitivity analysis
The IRR (Internal Rate of Return) is the discount rate that sets the net present value (NPV) of the investment to zero. It is the most widely used performance indicator among institutional investors:
- Unlevered IRR: asset return independent of financing. It enables like-for-like comparison between projects.
- IRR on equity (levered): return on equity after debt service. Leverage amplifies the return if the unlevered IRR exceeds the cost of debt. Our tool allows debt modelling (amount, rate) to calculate the equity IRR.
- Sensitivity analysis: our sensitivity matrix crosses discount rate and exit rate to visualise the impact on DCF value. Green, yellow and red zones help identify favourable and unfavourable scenarios.
For a well-located office building in Luxembourg City with firm long-term leases, a target IRR of 5.5 to 7% is representative in 2025. For value-add assets requiring renovation or reletting, investors target an IRR of 8 to 12%.