Buy-To-Let Is Back!

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By

Alan Oscroft

Published in Company Comment on 24 November 2010

Paragon grows profits by a third and sees the rental sector expanding.

Buy-to-let, that's sooo 2007 isn't it? 

Maybe not. The Paragon Group of Companies (LSE: PAG), the specialist buy-to-let mortgage lender, saw its profits grow by a third in the year to 30 September 2010.

In a full-year results statement published on Wednesday, and immodestly titled "Paragon Makes Excellent Progress", the company reported pre-tax profit of £71.8m, which is 32%, up on last year's figure of £54.3m and ahead of analysts' forecasts.

Diluted earnings per share of 17.8p were reported, up from 13.7p last year, and a 9% rise in the full-year dividend, to 3.6p, was declared.

Paragon slumped when the credit crisis hit and sources of cheap mortgage funds dried up, and it withdrew from the mortgage market in early 2008. That led to a collapse in the share price from a peak of over £12 in 2006, to a low of just 31p by the end of 2008.

New lending

But after securing a new £200m funding facility, Paragon has now recommenced new lending in the buy-to-let mortgage market. Those who bought the shares at the low point are today sitting on a 5-bagger, with the price back up to 168p at the time of writing.

The company also reported a fall in provisions for bad debts, from £66m as of September 2009 to just £39m, and its 3-month buy-to-let arrears figure stands at a lowly 0.83%, against a market average of 2.45%.

Paragon's cash generation looks good too, with free cash balances rising to £148m, up from £84m a year ago -- and that's after having shelled out £21m to buy up a mortgage portfolio in September.

Future expansion

In line with the overall recovery in the mortgage lending business, and seeing strong demand in the private rental sector, Paragon now hopes to expanding its lending in the coming years, with chief executive Nigel Terrington saying:

"We fully expect that our new lending programme will expand over time and will be complemented by increasing opportunities to acquire loan portfolios and take on new servicing contracts"

What do you think -- is the buy-to-let mortgage market set for another boom, and are lenders like Paragon going to bring home the profits? Share your thoughts below...

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Comments

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F958B 24 Nov 2010 , 4:47pm

The housing market had a bounce after the 2008/9 crash, but house price momentum is fading.
It's quite possible that the recent slowdown in housing has not yet come through to the bottom line of housing-related companies.
Nationwide data (pdf) here:
http://www.nationwide.co.uk/hpi/historical/Oct_2010.pdf

kalkanite 24 Nov 2010 , 11:24pm

There is still some way to go before the markets hit the bottom, but with 25% deposits and a mortgage fee of between 2.5 and 3.5% add to that the margins that BTL mortgages are getting above the BOE rate. BTL mortgage providers are set for huge profits.

matchmade 25 Nov 2010 , 3:15pm

BTL investors are getting low rates of return, barely 5% gross, but if they are prepared to invest 25% as a deposit using current mortgage rates and wait for house prices to rise, they will probably make a decent return eventually, albeit with lots of grey hairs dealing with the myriad problems caused by tenants.

First-time buyers just need to save like mad in order to get in ahead of downsizers and BTLers before they come to dominate the lower or first-time-buyer end of the market.

FTBers claim they are essential to the housing chain, but clearly they are not if investors are prepared to buy instead. On current trends it looks like the UK will see a steadily falling number of people owning their own homes, and more renting for the longterm as they do on the Continent.

Perhaps the Government will then consider applying capital gains taxes to principal private residences, as it used to do before 1965. This incredibly generous free ride for homeowners has gone a long way to create our national obsession with private housing as a source of tax-free wealth, and it is time it was abolished.

F958B 25 Nov 2010 , 4:05pm

I think that CGT on private residences would literally trap people in their own home because if they sold their home, then got taxed on any "profit", they'd be unable to afford an equivalent house somewhere else in the country.
The result would be that the only house moves that many people could ever make would be downsizing, since they'd lose so much to taxes.
It would also deter the elderly from selling their home to downsize and release caiptal for general living expenses, since if they sold the home, they'd find that CGT would tax-away any equity release that they tried.

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