A 6pc yield – but there’s a time limit

Funds investing in solar power are one of the few places investors can still find a 6pc yield with protection against inflation – but the death of Government subsidies for new projects puts a question mark over future returns.

As with other infrastructure funds, solar funds are listed companies that then own and operate solar farms to generate an income. Investors buy shares in the company, and receive income via dividends.

There are three main funds: Bluefield Solar Income, Foresight Solar, and NextEnergy Solar. More than £1.5bn is invested across all three, with the funds yielding 6.3pc, 5.6pc and 5.7pc respectively. Ongoing charges are 1.24pc, 1.38pc and 1.16pc annually.

Until recently, the new projects that these funds invested in benefited from “renewable obligation certificates” (ROCs).

Energy companies had to meet their renewable obligations by collecting ROCs, which they could achieve by buying power and certificates from accredited renewable energy generators. This effectively provided a valuable subsidy to solar projects.

But earlier this year, the ROC scheme closed to new entrants, while support for existing participants will continue until 2037.

That means those projects with ROC support in place before the cut-off will maintain the benefits for 20 years from when they started.

Richard Curling, manager of Jupiter’s Fund of Investment Trusts, which invests in various trusts, said that it is the subsidies that have made investing in solar projects for income worthwhile.

The concern is what happens next – first to the funds in the short term given the lack of new subsidised projects for them to invest in, and then over the long term, once the tap is turned off on those projects’ subsidies.

Mr Curling said: “My worry is that managers are tempted to grow their funds by taking on projects without subsidies that will yield lower returns. Or that they invest abroad – as NextEnergy just got permission to do – which may not be an issue, but changes the risk profile.

“Essentially they have to stop growing and concentrate on making returns.”

To add to the problem, there are few subsidised projects currently available for the funds to buy. This has pushed up prices, meaning companies risk overpaying to continue expanding.

In the long term, the value of solar farms without the support of subsidies comes into question too.

Most infrastructure investments have a limited lifespan. As a result, funds write off the value of the physical infrastructure entirely. In other words, they operate on the assumption that the assets will be worth nothing at the end.

Solar funds operate no differently but have one distinct advantage, said Mr Curling.

“Solar panels will have a residual value at the end – they don’t just stop working, and the fund will still own them. So there is a value to these assets that isn’t on the books,” he said.

One feature of solar funds that is of particular use to investors is that a chunk of their revenues are linked to power prices. That means there is a degree of inflation linking, protecting returns in higher inflation.

“For private investors looking ahead 25 years, that’s an interesting proposition,” said Mr Curling.

As with other infrastructure funds, Bluefield, NextEnergy and Foresight all normally trade at a significant premium.

This happens when the share price is higher than the value of the underlying assets. Bluefield sits at a 6.8pc premium, NextEnergy at 5.5pc, and Foresight at 4pc.

These premiums are less dramatic than in some other infrastructure sectors, such as care homes and medical facilities, where they can reach 20pc or more.

Mr Curling said that at these prices solar funds are “not cheap, not expensive”.

Specialist investment manager Octopus is offering an Isa where savers’ money is lent to residential property investors and where annual returns, which are variable, are expected to be around 4pc. Income will be paid monthly and when held in an Isa will be tax-free.

Octopus is better known for shares-based investments, but it has run a property lending business since 2009, lending £2.3 bn to date.

The underlying loans have short terms, typically 12 to 18 months, and borrowers pay average rates of 7.5pc. Investors will get exposure to a minimum of 10 loans and these are secured on the borrowers’ properties. Octopus provides the Isa account, so you cannot invest via your existing Isa provider or platform. You are not guaranteed to be able to withdraw your investment at will, but Octopus expects to be able to meet withdrawals.

Lendinvest, another small lender to landlords, is offering a fixed 5.25pc return to investors subscribing to its stock market quoted retail bond.

The offer period is open until August 4. Here, again, money is lent over short terms to mainly professional property investors. Apply via your broker. The bonds are expected to start trading on August 10 and are to mature in 2022.

Solar funds are attractive – but subsidy cuts are a threat, says James Connington