Paragon Bank’s Development Finance division has expanded its proposition to include Build-to-Rent (BTR) funding. We speak to Senior Relationship Director Simon Dekker on why Paragon has moved into the sector. 

Simon, why has Paragon launched a BTR proposition?

There are three key drivers. First, it’s a natural expansion of our product offering and feeds into our overall growth strategy.

Second, the BTR market is expanding rapidly with strong growth prospects and, third, our clients are telling us it's something they want.

How will Paragon’s proposition differ from the rest of the market?

A key difference will be enabling the developer to benefit from any potential market upside during the development phase. Most schemes today are forward-funded or forward-purchased, where the developer or construction firm develops the scheme at an agreed price, usually funded by an institutional investor or pension fund. That creates a lot of risk for the developer as they will bear the brunt of any increase in costs or delays to the construction of the scheme.

Our BTR proposition will enable the developer to build and retain the scheme. We can also support the lifecycle of BTR schemes in established residential locations in cities and large towns across the UK, including site acquisition, development, the letting of a completed scheme and a short-term stabilisation facility.

This will enable them to deliver stabilised income producing institutional-grade mid-size BTR schemes, which they can then operate on an ongoing basis or sell, benefitting from that market upside.

What are the ambitions for Paragon’s BTR offering?

Whilst I can’t give specific numbers, we see a lot of potential in the BTR market. We anticipate a similar level of demand to what we have experienced in the Purpose Built Student Market, where we are now one of the key funders for mid-sized schemes.

Being part of the Paragon Banking Group, a well-capitalised, profitable and financially strong FTSE 250 specialist banking group, gives us the confidence that we can support clients in this space.

What is the potential of the BTR market?

The BTR sector has already experienced strong growth in the past decade and the property consultancies we have worked with, such as Savills, are forecasting continued expansion for the market. Knight Frank predicts that the UK’s Build to Rent sector could almost double in total value over the next five years, reaching £126 billion by 2028.

There are a number of reasons for this, primarily tenant demand, which significantly outweighs stock in the private rented sector. BTR accounts for less than 1% of total homes in the rental sector, so there are clearly growth opportunities there.

Second, the BTR market is evolving, both in terms of where the developments are located and the type of homes being delivered. The sector originally grew out of London and catered mainly to the young professional market. Today, there are more units in regional locations and Single Family Homes, which are individual homes rather than units in a block, are one of the fastest-growing segments of the sector.

It’s popular with institutional investors because rent inflation has a very strong correlation to wage growth, so schemes deliver very steady, sustainable returns, and it’s also growing in popularity with mid-sized developers that are looking to build BTR schemes in entirety or as a parcel of units within a broader development.

How does the product fit in with Paragon’s wider buy-to-let offering?

It certainly complements the buy-to-let business rather than competes with it. As I said, BTR accounts for less than 1% of rental stock, and institutional investors won’t replace the traditional private landlord.

However, BTR brings good quality stock into a massively under-resourced tenure and gives tenants more choice, which can only be a positive outcome.

Visit our Build-to-Rent webpage for further information.