MORTGAGE LENDERS have rejected calls for the regulation of buy-to-let lending after the Department for Trade and Industry petitioned in the High Court for six property investment clubs to be wound up.

Media coverage has suggested that extravagant buyto- let lending might be fuelling property speculation.

But the Council of Mortgage Lenders has said that property investment clubs do not represent mainstream buy-to-let investment and that lenders are alert to the activities of the clubs, taking strong and effective measures to identify inappropriate borrowing.

Instead of regulating lending, the CML is calling for property investment clubs themselves to be regulated.

The clubs 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.

The clubs claim to be able to negotiate these discounts with developers on behalf of their members. In addition to income from subscriptions, they 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.

In a briefing, the CML says that investors are encouraged by the clubs to accumulate property portfolios and capital rapidly by off-loading properties quickly and re-investing their profits.

But while some investors have prospered, 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.

However, says the CML, the profiles of property club investors and mainstream property investors are radically different. The motivation of club 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 mainstream landlords point to the long-term commitment of landlords. The CML’s own survey, published in March 2005, is the largest survey of buy-to-let landlords to date. It shows that over two thirds of respondents intend to hold their portfolios for over ten years.

Property club investment is also focused on new build property and overwhelmingly on apartments, yet lenders confirm that only around 5-10 per cent of new buy-to-let lending is for new-build property.

The CML is raising the issue of property investment clubs with a number of other bodies whose members have a role in ensuring that the public are not put at risk by inappropriate activity. These include the Law Society, Royal Institution of Chartered Surveyors, the Home Builders Federation and British Property Federation.

The Office of Fair Trading is known also to be concerned about misleading advertisements by the clubs and is expected to produce a report by the end of the year.