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The investment opportunity from Britain's ebbing home ownership cult

Paragon attracts investors who expect the buy-to-let market to grow and want to avoid Britain's opaque banking sector.

 
The investment opportunity from Britain's ebbing home ownership cult

Will home ownership continue to recede, supplanted by renting? That’s part of fund manager Jamie Hooper’s investment thesis for buying shares in buy to let lender Paragon (PARA.L).

Home ownership has been slipping since 2007, ending a decades-long upward trend, according to the government’s English Housing Survey. The age of the average first time buyer has been rising, while a ‘generation rent’ has been spawned, as it becomes more difficult to get on the housing ladder.

But it has long seemed unlikely that Britain’s ‘my house is my castle’ cult of home ownership will be displaced by the sort of longer-term renting culture in European countries such as France or Germany, where the laws may better favour tenants.

Jamie Hooper though is backing up a conviction that this long-held trend is changing with a ‘high conviction’ bet on buy-to-let lender The Paragon Group of Companies.

Return from the depths of the crunch

Having seen its profits and share price thrashed in the credit crunch, shares in Paragon are up 28% so far this year as it re-starts business after a post credit crunch period of dormancy.

‘We think buy to let is a fantastic trend,’ said the manager of the Axa Framlington UK Growth Fund .

‘The average age of a first-time buyer is now 39. Paragon had its problems years ago, had its rights issue, raised money and was fully funded and do you know what now it’s saying, "Give us a bit of money, we can start to lend", and its earning great margins on its new business.’

Paragon also represents a way for the fund manager to keep some exposure to financials – a sector which he is underweight – without relying on banks. 

Unlike Britain’s troubled banks, Hooper explains, Paragon ‘has longevity to its returns, it is growing its [mortgage] book, its ROE [return on equity] is going up – ie, the measure of profitability we look for in a banks – it is consistent and repeatable and is playing a longer-term trend rather than guessing what this quarter’s numbers is going to be, which I fear is how banks are being played this year.’

City support

Paragon recently announced two credit lines from Macquarie and Lloyds, totalling £450 million, as well as a £200 million securitisation. It has also been buying up portfolios of consumer credit from banks.

As a result, Berenberg Bank on Friday upped its price target for the shares to 280p (they currently trade at 251p) describing 2012 as a ‘turning point’ for the company. Analysts across the City mostly rate the shares a ‘buy’ or outperform’, saying the company is in a strong position to grow its buy-to-let lending business.

Fund managers have large stakes in the company, with nearly 15% of Paragon shares held in BlackRock funds.

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