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Property investment clubs
by Sarah Modlock
If you're tempted to make your millions or build your pension via bricks and mortar then make sure you get the foundations right. Buy-to-let has become increasingly popular in recent years but you need to do your homework. If you are tempted by Property Investment Clubs (PICs) then make sure you understand how they work and how they differ from buy-to-let options.
The activities of PICs have recently been the subject of press attention following DTI action in petitioning the High Court for six companies to be wound up. Sterling Mansion UK, Mansion Investments, Portfolios of Distinction and SMI Overseas claimed to offer help building a £1m property portfolio. Turningpoint Seminars ran courses costing £6,000, claiming to show how properties could be bought without a deposit. CM2 Services offered an investment scheme that it said would give investors 100% returns within 12 months. Following an investigation, the DTI believes the companies should be wound up in the public interest.
The Office of Fair Trading (OFT) is also known to be concerned about misleading advertisements by PICs and is expected to produce a report by the end of the year.
PICs typically operate by encouraging potential investors to pay large sums as subscriptions for access to new build or off-plan properties (normally flats) at discount prices. PICs claim to be able to negotiate these discounts with developers on behalf of their members. In addition to income from subscriptions PICs often also offer highly priced training courses, many of which, it is claimed, focus on the opportunities for investors to accumulate large property portfolios in a short time with little or no capital, and with potential risks at best understated. Investors are encouraged to accumulate property portfolios and capital rapidly by off loading properties quickly and re-investing their profits.
While some investors have prospered from their involvement with PICs, others are reported to have found that the promised special discounts are illusory, while much of the proffered advice and information was in fact freely available. Investors may find that they are unable to sell their properties easily, and that the rental income they can achieve is lower than they expected due to the concentration of investment property within a single development.
The profiles of PIC-style investors and mainstream buy-to-let investors are radically different. As the advertisements for PICs make clear, the motivation of PIC investors is essentially speculative and short term. Advertisements contain little reference to rental income, and focus on the ability to achieve rapid capital gains. By contrast, all available research on buy-to-let landlords, including surveys by ARLA and by the Council of Mortgage Lenders (CML), point to the long- term commitment of landlords. The CML survey, published in March 2005, is the largest survey of buy-to-let landlords to date. It shows that more than two thirds of respondents intend to hold their portfolios for over ten years, while less than 2% intended to leave the sector within a year.
Lenders' mortgage books also show that PIC-induced investment is a small element on the fringe of buy-to-let. As already indicated, PIC investment is focused on new build property and overwhelmingly on flats. Yet lenders confirm that only around 5-10% of new buy-to-let lending takes place for the purchase of new-build property. By no means all of this involves flats, and even where it does, the likelihood of PIC involvement is small.
If you do decide that a PIC is for you then don't expect your mortgage lender to be as excited. CML consultation reveals that lenders actively discourage short-term speculative investment and typically take a range of measures to ensure that their lending is responsible in this context. These measures include:
• Limiting their exposure in any one block of flats or development;
• Checking across different lenders for multiple applications by individuals in certain cases;
• Requiring an independent valuation of properties;
• Internally auditing valuations at intervals to check reliability;
• Requiring a rental assessment as part of the valuation, to determine both the likely rental level and the rental prospects; and
• Undertaking credit assessment of the borrower as well as of the property.
Despite clear evidence that some companies cannot be trusted, thousands of investors continue to sign up for the clubs every year. Your main defence is vigilance - if something looks too good to be true, then it usually is.
Graham Chase, the vice-president of the Royal Institution of Chartered Surveyors, says: 'When a property investment scheme or training course is offering easy access to vast riches, people should immediately look for the catch. Only by checking that the service is being provided by reputable, properly regulated professionals can customers ensure they are getting value for money and have a route to redress if something goes wrong.'
Inside Track, the largest operator in the sector, is calling on the Financial Services Authority, the City watchdog, to regulate the schemes. It believes regulation will be in its own best interests as well as that of consumers. 'We are very concerned about the poor quality of service being offered by many companies in this sector,' explains Tony McKay of Inside Track. 'We believe that it is in the interests of both the public and quality businesses offering property investment services to see regulation introduced.'
Inside Track, which runs seminars on property investing, and its sister business Instant Access Properties (IAP), which provides an investment service, are aware of the need to justify charges that some may consider to be on the high side. Inside Track's two-day seminars cost £2,495 and membership of IAP is a one-off £5,995. This year profits at both operations are expected to almost double to £17m. 'We feel that we have the correct balance between our charges and shareholder returns and reinvest a significant proportion of our profits for the benefit of our customers,' says McKay. Inside Track offers an eight-day cooling-off period, during which it provides a full refund if you decide to pull out.
Malcolm Harrison at the Association of Residential Letting Agents questions the need for investors to use these clubs: 'Most of the information provided by these seminars can be obtained for free from the Arla website (arla.co.uk) or from our members,' he comments.
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