Cast your mind back to 1996 — what do you remember? Football (almost) coming home and Gazza’s goal at Wembley? Oasis versus Blur? Or, if that macho posturing was all too much for you, perhaps the Macarena?
What probably doesn’t stick in your mind is the birth of buy-to-let (BTL).
The term ‘buy-to-let’ was introduced by the Association of Residential Letting Agents (Arla) at London’s Royal Automobile Club in September 1996. Despite a slow burn at first, the BTL concept steadily gained momentum, having a significant impact on the UK’s housing supply and encouraging new investment into a private rental sector (PRS).
If the industry was left for a period without tinkering, we might see some progress
Back in ’96 Arla had developed BTL with a small group of lenders, and one of the pioneers was Paragon. Fast-forward to 2023 and Mortgage Strategy spoke to those currently heading up Paragon Bank’s mortgage business, Richard Rowntree and Louisa Sedgwick — both with a wealth of experience in the BTL arena.
Rowntree is mortgages managing director and has been with the company since 2020, having previously worked at Halifax Bank, Lloyds Banking Group, Santander, RBS and Bank of Ireland.
Sedgwick joined Paragon as commercial director in April this year, leaving her role of managing director for specialist mortgages at Hampshire Trust Bank. She has also worked at Vida, Leeds Building Society and Bradford & Bingley.
On joining Paragon, Sedgwick said she was impressed with Rowntree’s ‘vision’ for the BTL business and wanted to help the firm achieve its strategic objectives. So what is that vision?
“The vision is still growth,” Sedgwick explains. “It is interesting because we have some very big portfolio landlords and we want to manage the life cycle of their time with us at Paragon and be able to introduce various touchpoints throughout that life cycle.
Most portfolio landlords take a longer-term view. They are experienced and have been through a number of economic cycles
“But what we also want to do is support the next budding portfolio landlords; those professional landlords coming through with a different outlook and proposition.”
So, how healthy is the supply of ‘budding’ portfolio landlords? And, at the same time, how worried should we be about the supposed mass exodus of landlords?
Rowntree is encouraged by the calibre of people becoming portfolio landlords but stresses that, right now, not enough landlords are “growing from acorns to oaks”. This is why Paragon places so much importance on supporting new blood in the market.
“We want our customers to grow with us; that is the key objective,” he explains.
As for the suggestion that the BTL market is witnessing an exodus and heading towards a crisis, Rowntree dismisses this as absurd.
“Professional landlords are undoubtedly reshaping their portfolios. Yes, some are leaving due to the number of regulations they have to contend with — around 169 rules before you factor in the Renters (Reform) Bill — and increased mortgage rates. But most portfolio landlords take a longer-term view. They are experienced and have been through a number of economic cycles.
We want to support the next budding portfolio landlords; those with a different outlook
“Most are not that highly geared and this is totally different from the situation following the financial crisis.”
One area that Paragon is ideally placed to help with — in what, 27 years on, is now a mature market — is the transition from one generation of landlords to another. Some longstanding professional landlords are now looking to pass on their portfolios, whether that be hand-me-down to a younger family member or with a transfer to an unassociated third party.
“Our role is to ensure they get the support they need for a good outcome,” Rowntree says.
Positive signs in the PRS
Rowntree sees the PRS as an important driver of the economy but he identifies that, due to housing supply issues, there is an imbalance. Those who traditionally would be in the social housing sector are having no choice but to live within the PRS. This is not something that was ever intended, nor is it in any way ideal.
Diversity is the smart thing to do. A narrow skillset and outlook will narrow your thinking
“Housing has been overlooked,” says Rowntree. “There has been no strategic review of housing for a long time.”
For landlords, renters and housebuyers, lack of housing stock is an ongoing problem. As Rowntree emphasises, even if the government was on course for its now-abandoned target of 300,000 new homes a year, we would still be looking at a significant undersupply.
New-build aside, however, within the PRS there are some positive signs.
“What we are seeing, which is encouraging, is landlords starting to buy back property for refurb, which will help boost the rental sector,” says Rowntree.
He adds: “And, if mortgage rates hit the 4% mark — and we are heading in that direction — this should drive interest from landlords in terms of increased property purchase.”
You need to set targets and align your executive to them. If you don’t measure it, it doesn’t get done
Sedgwick name-checks houses in multiple occupation (HMOs) as another area of growing interest.
“Coming out of Covid, the general feeling was who would want to invest in HMOs in city centres? But things are changing fast — people want to be in the heart of the action again. The demand for and the quality of HMOs — as well as the yields they are offering landlords — are getting better.”
It is fair to say that the traditional transition from 20-something renter to 30-something buyer is far from the norm anymore. Inflated mortgage deposits have priced potential first-time buyers out of the market; the only other option being to find rented accommodation in what is a limited sector.
Undoubtedly, lack of clarity, in the shape of policy reversals — whether that be jettisoned housebuilding targets or relaxation of energy performance certificate (EPC) rules — has created uncertainty at a time when clear direction and leadership should have been fundamental.
We are taking our existing platform and replacing it with one we have built ourselves
Sedgwick elaborates: “We have had constant regulation changes. If the industry was left for a period without tinkering and with a housing minister in situ for a reasonable length of time, we might see some progress.”
EPC reprieve
Improving the quality, and in particular the energy efficiency, of rental property has been a headline-grabbing subject for some time. There has been no shortage of news stories declaring the arrival of EPC regulations as catastrophic for UK landlords on costs grounds.
Back in April, a survey by Mortgage Advice Bureau indicated that two-thirds of landlords believed they might have to sell up if forced to make EPC upgrades in line with the government’s new Minimum Energy Efficiency Standards.
There has been very little innovation in the BTL market in terms of green products over the past 10 years — and we’d like to change this
Of course, we now know that the regulation for properties to adhere to a minimum EPC rating of C by 2025 for new tenancies, and by 2028 for all rental properties, has been shelved.
Rowntree never subscribed to the argument that landlords would leave in their droves and the pressure from EPC regulations would be a deciding factor in this feared exodus.
He is keen to point out that many landlords are already a long way down the road in terms of improving EPC ratings of properties, but he also believes that shelving the 2025/28 deadlines makes good sense.
“Half of landlord properties are already in the A-to-C rating. Tenants now expect well-insulated, energy-efficient properties and are very aware of net-zero commitments.”
“I admit I was surprised to see the EPC regulation deadline scrapped — but the 2028 timeframe was over-ambitious. You were talking about around 4,000 properties a day having to be upgraded, without sufficient [building] skills or funding available to achieve that.”
We have got better at tapping in to communities at entry level and developing those people
As Rowntree points out, the danger of trying to satisfy a tight deadline was of work being rushed and of a poor standard — itself defeating the object of improving the quality of rental stock.
“Without doubt the commitment to the green agenda remains; there are just clear positives in terms of providing more time for landlords to upgrade.”
This green agenda applies not just to housing stock but to products coming to market. Sedgwick stresses that Paragon is very aware of the importance of sustainability.
“We want to innovate and drive some green product propositions, and potentially some retrofit propositions as well.
“There are lots of things going on in the background but there has been very little innovation in the BTL market in terms of green products over the past 10 years — and we’d like to change this.”
Market share and future plans
Since 2020, when Rowntree arrived at Paragon, there has been a planned progression towards professional landlords. Although the firm still has some amateur landlord clients, over the past five years the breakdown of business has changed to around 98% complex portfolio landlords and 75% limited companies.
Half of landlord properties are already in the A-to-C rating
Paragon is a regular fixture in the table of top 10 UK BTL lenders, albeit Rowntree is keen to put the numbers in context.
“If you take the total BTL market, we are about a 4% player, but that is because a large part of the market is not professional or complex. We are specialist lenders, dealing with more complicated company structures, multiple directors, larger portfolios and specialist properties.”
When it comes to ‘professionalisation’ in the market, both Sedgwick and Rowntree are impressed with how things have evolved over the years.
They point out that, in the late 1990s and early 2000s, it was pretty much ‘anything goes’ in the sector, with little in the way of governance. However, regulations brought in steadily have improved the status of the BTL market immeasurably.
Technology has been a key factor too in this changing BTL landscape and next year will be a significant one for Paragon in the tech space.
“We are taking our existing platform and replacing it with one we have built ourselves,” Sedgwick explains.
I was surprised to see the EPC regulation deadline scrapped — but the 2028 timeframe was over-ambitious
“Because we have developed it in house, it does everything we want it to do. We have connected with brokers and landlords and this has helped us to shape the platform and ensure it will work in the real world.”
The Paragon team are very pleased with how things have developed with the platform and they will provide updates as the launch time draws closer — so watch this space!
Diversity
We have touched upon the evolution of the BTL market since the mid-1990s but what about the sector more broadly and how it is shaped today? For instance, is the perception of the mortgage industry as dominated by white, middle-class, middle-aged men still valid in 2023?
“No,” is Rowntree’s considered response and he is in a good place to comment. The Mortgage Strategy Personality of the Year for 2023 is a board member of Progress Together — a membership body dedicated to advancing socio-economic diversity in the financial services sector. Rowntree is also a regular conference speaker on diversity issues and is the executive sponsor of Paragon Banking Group’s equality, diversity and inclusion network.
We are seeing landlords start to buy back property for refurb, which will help boost the rental sector
“Diversity isn’t just the right thing to do; it is the smart thing to do from a commercial sense and in terms of understanding your customers and creating better outcomes for them,” says Rowntree. “Having a narrow skillset and outlook narrows your thinking.”
A huge amount has been done in recent years to improve diversity in the industry, from individual firms to trade bodies and organisations such as Women in Finance. Rowntree stresses there is much still to achieve but giant strides have been made.
“We have got better at tapping in to communities at entry level and developing those people. What we need to see now is progression through to senior management and leadership level.
“It is the classic of, ‘If you can’t see it, you can’t be it.’ We have got better at improving this situation but we are nowhere near there yet.”
We want our customers to grow with us; that is the key objective
Today huge data sets are available that identify trends in career progression across gender and socio-economic background. This is a starting point in identifying who progresses, and how quickly.
But how do you go from collections of data to instigating change? Rowntree says storytelling plays a big part, specifically with those starting their career being able to identify with senior leaders, their background and their career pathway. But there needs to be more.
“You need to set targets and align your executive to them. If you don’t measure it, it doesn’t get done,” Rowntree says.
Sponsored rotation programmes are required to enable this transition from junior to middle, then senior, management. Rather than stay in one role and possibly see their career stall, employees should work in different departments to learn new skills and open themselves to new opportunities.
Housing has been overlooked. There has been no strategic review of housing for a long time
The concept (one being piloted by Progress Together) is essentially a throwback to an accelerated development programme, from which Rowntree himself benefited at the start of his career. Identifying talent and then providing the resources and guidance to maximise this untapped potential may seem an obvious action — but it isn’t always.
During challenging times all industries, including this one, benefit from the impetus of new blood with energy and a fresh perspective.
This article featured in the October 2023 edition of MS.
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