Questor: The market swallowed the media’s gloom on buy-to-let – and you can profit

But hopefully these negatives – much covered in the press – are being overplayed in the markets, especially in relation to the share prices of niche landlord lenders such as Paragon and OneSavings.

Whatever the previous government’s intentions in these policy changes, it appears that the most vulnerable parts of the sector are those middle-class, “amateur” or “armchair” investors who bought a flat or two alongside their pension and other savings. They will head to the exits. Any wobble in the housing market, triggered by Brexit or anything else, will chivvy them along.

You would expect to see lenders that have serviced this armchair brigade – including, for instance, building societies such as the Coventry – to lose market share rapidly and see a reduction in their loan book.

The more professional private rented sector, which is far too big for any government to dare to undermine in any serious way, and whose properties are desperately needed by local authorities, should continue to grow and prosper. Incorporated landlords, for instance, are exempt from the incoming mortgage interest relief reductions.

If existing properties are directly owned, they will probably attract both capital gains tax and stamp duty on being moved into a corporate structure, but these one-off costs can be accommodated by committed businesses.

The bigger, full-time landlords tend to be very cash flow conscious, more cautious about debt and less preoccupied with capital growth. The niche lenders that serve this “professionalised” segment could, with a little luck, do very well indeed.

In time existing borrowers with the “mom and pop” lenders, such as Coventry, might remortgage with specialists, concentrating the sector further and boosting the growth of today’s niche players such as OneSavings (it has less than 5pc of existing and new loans).

Since we bought into OneSavings this rosy view has solidified.

The Council of Mortgage Lenders expects buy-to-let mortgage transactions (buying and remortgaging) to shrink by 6pc this year and then 2pc next. That is a modest decline, particularly given the noisy headlines proclaiming the sector’s complete demise.

Specialists such as OneSavings and Paragon need grow their share only modestly in order to continue delivering rapid growth. From an underwriting point of view many of these specialist lenders’ processes were already up to the standards being required by the Bank of England from January 1. Other, more mainstream lenders are having to work hard to implement new processes – if indeed they wish to remain in the sector.

In a trading statement last week, Paragon, the first lender to report results for the final quarter of 2016, said its pipeline of loans for December 2016 was £640m, twice the level of September and surprisingly higher than the December 2015 figure of £596m.

In a note published on Tuesday, Barclays analysts drew on Paragon’s figures to revisit other niche lenders including OneSavings, whose target price it raised from 340p to 420p.

As regular readers of this Friday page know, our income portfolio is now largely invested. But we’re confident with this choice and it remains a Buy.

Questor says: Buy

Ticker: OSB

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