UK lender Paragon sees regulatory changes slowing buy-to-let growth

(Reuters) - Paragon Group of Companies Plc said recent fiscal and regulatory changes and proposals may soften the rate of growth for buy-to-let as time progresses, but demand for rental properties would remain strong.

Britain will raise the level of property tax for those who buy a house in order to rent it and on second homes, finance minister George Osborne said in November, as part of plans to cut government spending and raise revenues.

Additionally, banks across the world would have to set aside more capital to cover buy-to-let mortgages and place greater emphasis on a borrower’s ability to repay a home loan, under draft rules from global banking regulators.

However, to date, there has been no change in existing buy-to-let customer behaviour, Paragon said.

Paragon said its credit metrics would support the use of an Internal Ratings Basis (IRB) approach for assessing appropriate buy-to-let risk weightings and preparations for an application were underway.

Paragon’s core Tier 1 ratio stood at 16.8 percent at Dec. 31, with a leverage ratio of 7 percent.

“As we have stated previously, we readily concede that Paragon faces a regulatory overhang, but we feel that it is well placed to move to IRB and that the private rented sector remains in structural growth,” Jefferies analyst Phil Dobbin wrote in a note.

The company also said these fiscal and regulatory changes are likely to boost investment by professional landlords.

The British buy-to-let mortgage lender reported a 12.3 percent rise in pretax profit to 33.9 million pounds ($48.6 million) in the first quarter ended Dec. 31, 2015.

Paragon’s buy-to-let lending pipeline stood at 595.7 million pounds at period end, 43 percent higher than a year ago.

Buy-to-let is a form of residential investment in which a property is bought, typically with a mortgage, with a view to renting it out.

Increasing house prices, brought about by restricted supply and an uptick in demand, have made such investments more attractive.

Paragon’s acquisition of asset finance business Five Arrows Leasing from Rothschild & Co, has made its bank profitable on a monthly basis, the company said.

Paragon launched the retail-funded lending bank in 2014 to enable it to diversify beyond the mortgage market.

Solihull, West Midlands-based Paragon’s shares were up 2.6 percent at 321.4 pence at 0806 GMT on the London Stock Exchange.

The rise was despite a fall in Europe’s banking sector, with the Stoxx 600 Banks Index down 0.73 percent.

($1 = 0.6978 pounds)

Reporting by Noor Zainab Hussain in Bengaluru; Editing by Sunil Nair and Anand Basu