“Shiny-suited salesman” Nick Tadd was a salesperson for one of the UK’s biggest property fraud’s Inside Track and Inside Access Properties, which sold off plan properties at grossly inflated prices (originally published at https://www.propertyweek.com/residential-and-development/trouble-in-clubland/3061241.article) causing losses estimated at more than 10 million pounds.
Might the market be turning on property investment clubs and their debt-laden investors?
Gwyn Roberts joined a club meeting in Farnborough to investigate
Shares are outperforming residential returns for the first time in nearly a decade. In 2005 the FTSE 100 index reported a 17% rise, easily beating a sluggish residential sector that failed to extend itself much beyond 2%-3% returns.
But this apparent reversal in investment fortunes seemed irrelevant to the 18 prospective property investors who gathered at the Holiday Inn, Farnborough, just before Christmas for a presentation from Inside Track, the ‘educational wing’ of Instant Access, the UK’s largest property investment club.
Evenly divided between the sexes and forming a broad cross-section of age and race, they were there to learn about the wealth-creating secrets of residential investment and not to compare the merits of stocks and bonds with those of bricks and mortar.
But then again, why should they? Shiny-suited salesman Nick Tadd made it clear that Inside Track’s business model has worked well for him. This TV cameraman told the prospective investors that, in a little over 18 months, he had completed £2.6m in residential deals, £600,000 of which was clear equity. Flush with success, he had just bought a 35 ft yacht using, in his favourite phrase, ‘other people’s money’.
‘I bet you want to know how you can do this,’ he asked his audience, and clearly many of them did.
Inside Track has introduced 12,000 people to residential investment. Veteran members at the Farnborough workshop said they have become rich using a system by which the club negotiates discounts for bulk sales.
The models used by property clubs differ, but all form part of an industry that is worth £1.5bn and accounts for up to 10% of all residential investment.
However, some are not so enthused about the growth of largely unregulated investment clubs. Allegations of over-optimistic valuations and a growing oversupply of the city flats that form the bulk of property club purchases have led to the perception that this is a rogue sector.
Quite apart from the sharp operators – five clubs were shut down by the DTI in 2005 – their debt-heavy business models are seen as fundamentally flawed and too risky for small investors.
Without explaining the possible downside, apart from a brief warning that property should be viewed as a long-term investment, Tadd told a rapt audience that they could get rich using the bank’s money to access 100% ‘gifted deposit’ mortgages, remortgaging regularly to benefit from a property’s tax-free capital uplift. It is easy to see why the British Property Federation, the RICS and the Council of Mortgage Lenders all expressed reservations about property investment clubs last year.
‘We are concerned with the upfront costs of many of the clubs,’ says Ian Fletcher, director of commercial and residential for the BPF, which continues to bar property clubs from membership. ‘If you spend £5,000 to join, you will have high expectations, which could lead you to choose a property too quickly. My concern with this is that the stock is not good enough.’
James Thomas, residential director of Jones Lang LaSalle, is another doubter. His investment team avoids doing business with the clubs.
‘We believe they exploit first-time investors and are not good customers,’ he says. ‘They have tried to dictate to our clients and control sales contracts. Many of them care only for the discount and do not give a great deal of thought to where the stock should be.’
Anthony McKay, chief executive of Inside Track and a former Chesterton commercial chief, is eager to dispel the idea that his firm is part of a twilight industry. He is in discussions with the Treasury about regulation of the sector, and is trying hard to highlight the legitimacy of the service his company provides.
‘Every time the industry gets a bad press we get cancellations,’ he complains. ‘This is obviously something I’d like to stop.’
McKay says that despite the purely positive spin at Inside Track’s free, introductory workshops, those who graduate to the £2,495 weekend seminar walk away with their eyes open.
‘If you sent an accountant to the workshop he’d be apoplectic, but we judge ourselves by the success of our members,’ says McKay. ‘At the front end of the business we are a sales tool but, by the time people are investing, they know what we are about. We cease to be a pressure seller.’
He adds that, contrary to the assertions of Tadd – one of several members who act as greeters and presenters, receiving money for every seminar recruit – investors need ‘good financial standing’ before investing.
Those signing up for a seminar undergo financial background checks, he says, while typically ‘the minimum you have to put down for a property is 10%. Add to this the 10%-25% discount we secure and they already have a lot of equity in the product.’
Factor in the cost of the two-day seminar, the £6,000-£6,500 fee for joining Instant Access, and a 3% finder’s fee for every property bought, and McKay believes the unsuitable are automatically barred from the process.
Unfortunately, if an investor is determined or desperate enough – and a club is crooked enough – expense is not always such a barrier. McKay accepts that sharp practice abounds and acknowledges that regulation is the only answer. He says that having more attention pinned to ‘paying a £20-a-month pension, rather than buying a £170k flat from us, is wrong’.
We’re no longer taking schemes in certain city locations
Anthony McKay, Inside Track
Some clubs fall under the Financial Services Authority’s regulation of collective investment schemes, but most are beyond its remit. McKay is lobbying for closer controls, but says Treasury officials have told him that self-regulation is the best solution.
The British Property Federation has rejected McKay’s own suggestion for an 18-point code of practice, while the RICS has yet to give an official response to his proposal. The BPF’s Fletcher says his organisation failed to back the call for self-regulation because ‘we believe the best way to protect investors is through government regulation’.
McKay says part of the reason for the lack of interest in regulation is that few comprehend the industry’s true scale. ‘It is worth £1.5bn and should be regulated as such,’ he says.
However, he accepts that many still see the business model as perpetually risky. Over-reliance on debt or a lack of tenants has doomed the most experienced developers and investors. Critics wonder how an overextended junior investor can be expected to cope under the same circumstances.
McKay says members are told they should have the funds to cover at least a year’s mortgage. But at the Farnborough workshop, Tadd failed to mention the importance of contingency planning or that any rental income would be taxed.
Rob and Mia Draston are experienced investors who own four properties. They attended the Farnborough meeting and stressed that, although nothing was deliberately hidden, Tadd was a master at over-emphasising the upside of residential investment.
‘If you lose tenants you’re in trouble, and I was concerned that no mention was made of this, or of needing cash in your bank for emergencies,’ said Rob Draston. ‘There was definitely a positive bias and [Tadd] doesn’t labour the risks.’
Despite these apparent risks, many have prospered. Don Robbie, one of six Inside Track greeters at the Farnborough event, says the model has served him well. He was one of millions of professionals forced to forget about an early retirement when Equitable Life failed, and says property investment has given him more control over his financial future than a pension plan ever could.
So far he has bought one property through Instant Access, ‘a Crosby-built flat in Manchester at a £25,000 discount’, and has accumulated another five through the skills gleaned from Inside Track.
‘It has taught me to sniff out a good deal,’ he says. ‘I’ve just secured a 12.5% discount on two flats in the West Midlands while everyone else has bought from the list price.’
Robbie believes his faith in discounted city centre flats will be rewarded by a doubling of values within a decade of the deal’s completion. But for some, the suspicion lingers that many bargain, off-plan developments are overvalued, automatically negating the discounts property clubs claim to pass on to their members.
McKay dismisses such accusations.
‘It takes us 10 weeks before our property gets to the market, we reject eight or nine out of every 10 properties and we carry out independent valuation by the RICS, so I don’t think overvaluation is a problem,’ he say.
‘We fall out with developers over values, because we won’t be messed with on prices.’
But he admits that the love affair with residential development in northern cities, a relationship that has boosted so many property investment clubs, could be about to peter out.
‘Since April/May 2004 prices have stood still or have dropped 5%-10%, and we are rejecting more deals,’ he says (see table 2). ‘We’ve still got some extremely good schemes in Manchester, Leeds and Newcastle, and the rental markets are holding. But in Manchester alone there are still 6,000-7,000 flats coming on to the market and the tenant pool is limited.
‘We will still look at a place like Manchester if the deal is sexy, but things have definitely slowed in the north. And that means we’re no longer taking schemes in certain city locations.’
The end of the boom will inevitably expose the weaknesses of many of the clubs, and upset members in the process. But McKay argues that it will equally highlight those that serve their members well. Instant Access is sourcing properties in Glasgow and Northern Ireland and believes it is ahead of the curve when it comes to property as a long-term investment (see table 1).
But with many property investment club advertisements and seminars still presenting a get-rich-quick scenario, those hoping to win wider property industry acceptance will need to change their initial sales pitch if they are to reverse the current perception of the sector.
Losses are in the tens of millions