The profitability of real estate investment in London is a topic that the investor considers when assessing and analysing.

Before going into the specifics, one must first define the concept of profitability, which is based on two main factors: ROI and ROE.

-Definitions :

ROI (Return on Investment) refers to the return on total invested capital, signalling the efficiency of management.

ROE (Return on Equity) means the profitability ratio of invested capital, as equity. The clarification and definition of the two ratios is of fundamental importance from the perspective of capital rationalisation and investment optimisation.

The condition on which the profitability analysis is based is that the property purchased is leased according to standard lease agreements, i.e. not according to short lets. Notwithstanding the condition on which the analysis is based, the return on investment (ROI) on the property in London is in the range of 3.8% to 4.5%. These values may not be exceptional if viewed solely as intrinsic values, but there are other aspects that make real estate investment in London attractive.

These aspects can be traced to the following:

Revaluation of the real estate asset purchased;

Indirect differentiation of the financial portfolio, through purchasing real estate in sterling (GBP);

Flexibility of leases, with a minimum term of 1 year;

Executable eviction proceedings, in the event of tenant insolvency, within three months;

Tenant restrictions on making changes to the property.

ROE or Return on Equity can be maximised through the use of leverage. In the UK it is not necessary as a prerequisite either to be resident or to generate income in the country in order to have access to leverage; on the latter the subject becomes interesting in several respects. Indeed, one can access several dedicated mortgages, which are called buy-to-let.

-The financial instrument:

Buy-to-let mortgages are approved and disbursed by credit institutions taking into account first of all the intrinsic profitability of the property, i.e. assessing the sustainability of the operation. Subsequently, one can opt for two types of mortgages and they are as follows:

buy-to-let with repayment of capital (C) + interest (I) ;

buy-to-let with repayment of interest only (I).

Depending on the type of mortgage one decides to opt for, the ROE takes on different values, as one will end up with a different net result if one decides to also repay the capital share or not.

In the case of opting for a mortgage with interest-only repayment, the capital portion will have to be repaid at the end of the mortgage term, with the possibility of being refinanced again later. This allows the investor to direct the equity replaced by the bank into other types of investment.

Below we illustrate an example of a return on investment of £350,000.00 in real estate in zone 3, accessing a mortgage of 50 % of the investment value, i.e. LTV 50 % (loan to value).

• Mortgage amount in example £ 175,000.00

  I = interest

  C= capital

  As previously mentioned, the real estate investment, in addition to being analysed from the point of view of its direct profitability, should, in a more general way, be assessed taking into account the five aspects listed and especially the first one, i.e. the revaluation of the real estate asset in a longer-term perspective of the investment made.

  The entire regulation of buy-to-let mortgages can be consulted at: http://www.bankofengland.co.uk/prudential-regulation/publication/2016/underwriting-standards-for-buy-to-let-mortgage-contract