More than a million investors use buy-to-let to generate an income from their capital. Now there is a way of obtaining similar returns, and also from buy-to-let – but without actually buying a property.
Specialist mortgage lender Paragon, itself quoted on the stock market and valued at £1.1bn, is seeking to raise capital by issuing bonds which will pay a fixed 6.125pc per year.
Investors – who must buy a minimum £2,000 worth of bonds, but can subscribe above that figure in multiples of £100 – will be paid income twice-yearly in January and July. The bonds are eligible to be held inside an Isa or pension account, meaning the interest can be received tax-free.
The bond matures in 2022 when – all being well – Paragon repays lenders their money.
Investors face the risks of Paragon running into difficulty during the bond’s life, which could jeopardise some or all of their capital. There is no protection under the Financial Services Compensation Scheme if Paragon were to collapse. The other risk is that interest rates rise strongly during the term and reduce the attractiveness of the 6.125pc fixed interest or “coupon”.
Is Paragon a safe bet?
The lender, which prefers its customers to be experienced landlords rather than novices dipping into buy-to-let for the first time, faced severe difficulties during the financial crisis.
Its problems were triggered by banks’ refusal to renew a loan facility in 2007. It issued new shares to plug the gap, but had to mothball its lending operations for several years. Now it is back doing business with landlords and its shares, which fell to 40p in March 2009, trade at 356p. After tax profits have grown from £41m in 2009 to £85m last year.
The company paid a total divi of 7.2p in 2013, giving a yield of about 2pc.
Paragon’s bonds are genuine “retail bonds” in that they will be traded on the London Stock Exchange with prices quoted daily. Selling bonds on the open market, via a stockbroker, would be the only way investors who needed the return of their capital could exit ahead of the 2022 maturity date. The closing dates for subscriptions is January 27 and investors should apply via their stockbroker or, if they don’t have one, one of the eight participating brokers listed on Paragon’s website.
Paragon has raised money in this way once before. Early last year it borrowed £60m through a similar bond issue, but where the interest rate was fixed at 6pc. This tranche of bonds mature in 2020 and have traded on the London Stock Exchange since February 25, 2013.
This graph shows how the price has remained within a close margin of the 100p issue price, dipping to 99p and rising at a peak to 104p in November. Trading data shows regular deals for 5,000 or less, suggesting the bond remains popular among private investors. On Thursday January 16 the bond was trading at 100.65p, generating a yield of just under 6pc.
This suggests the 6.125pc interest on offer with the new issue is attractively priced.
Paragon Plc 6pc bond (issued February 2013), London Stock Exchange
How does 6.125pc compare with returns on real buying-to-let?
Paragon publishes its own regular snapshot of yields obtained by its landlord borrower customers, worked out as the ratio between rents obtained and the value of the property.
As house prices have risen yields tend to have fallen, although an increase in rents has offset this trend. In its latest data, released in November, it said: “landlords reported they generated an average yield of 6pc in the third quarter of 2013. This compares to 6.1pc in the second quarter and 6.7pc in the first”.