Ill wind for buy-to-let as Paragon struggles with liquidity
The news that Paragon, the buy-to-let lender, could be heading for a liquidity crisis will be of concern to landlords.
Paragon is the third-largest lender in the UK rental market and its difficulties could be a precursor to a major shake-up of the buy-to-let sector.
The buy-to-let market has grown strongly in recent years, however interest rate rises have reduced rental yields and many investors are now more reliant on house price inflation to make a profit.
While demand in the private rented sector remains strong, there are signs that rents are falling and predictions of stagnation in the housing market, or a fall in prices, make the outlook stark for many landlords.
Paragon has seen its shares drop by over 70% this year and is currently planning a rights issue to shore-up its balance sheets.
The credit squeeze has resulted in the lender’s usual sources of funding drying up and it has recently arranged a standby emergency funding package worth £280 million, with UBS.
This agreement has been described as “highly conditional” and some are questioning whether the company will survive.
Paragon has cut back growth plans for 2008 with chief executive, Nigel Terrington, warning that the company will slow down its lending because it would be irresponsible, during a slow-down of the housing market, to increase it.
According to Justin Stewart of Seven Investment, the portfolio manager, the news from Paragon “is the dose of reality in this industry we have been waiting for, for a long time”.