Q&A with Paragon Bank’s Senior Relationship Director

BTR News in conversation with Paragon’s Senior Relationship Director on the company’s ambitious Build to Rent proposition.

Simon Dekker, Senior Relationship Director at Paragon Bank | BTR News
Simon Dekker, Senior Relationship Director at Paragon Bank.

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

Simon, why has Paragon launched a Build to Rent 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 Build to Rent 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 Build to Rent proposition will enable the developer to build and retain the scheme. We can also support the lifecycle of Build to Rent 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 Build to Rent schemes, which they can then operate on an ongoing basis or sell, benefitting from that market upside.

What are the ambitions for Paragon’s Build to Rent offering?

Whilst I can’t give specific numbers, we see a lot of potential in the Build to Rent market. We anticipate a similar level of demand to what we have experienced in the purpose-built student accommodation (PBSA) 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 Build to Rent market?

The Build to Rent 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 £126bn by 2028. There are numerous reasons for this – primarily tenant demand – which significantly outweighs stock in the private rented sector. Build to Rent accounts for less than 1% of total homes in the rental sector, so there are clearly growth opportunities there.

Secondly, the Build to Rent 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 housing (SFH) is 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 develop Build to Rent schemes in entirety or as a parcel of units within a broader development.

What do you think are the key opportunities in the SFH sector?

Typically, SFH delivers higher profit margins per unit, cater to a strong and stable demand for homeownership, and require less complex construction and management. Their larger square footage allows for premium pricing and attractive features, boosting buyer appeal. Additionally, individual houses offer flexibility in design and development, allowing developers to cater to diverse buyer preferences and maximise land usage. Savills’ recent paper on the market highlighted the opportunity well. For the developer, SFH can accelerate housing delivery because they appeal to a complementary market to purchasers and the developer can package up homes for sale to an investor, helping to fund the remaining phases of a scheme.

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

It certainly complements the buy-to-let business rather than compete with it. As I’ve said before, Build to Rent accounts for less than 1% of rental stock, and institutional investors won’t replace the traditional private landlord. However, Build to Rent brings good quality stock into a massively under-resourced tenure and gives tenants more choice, which can only be a positive outcome.