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

The Daily Telegraph - Your Money - - YOUR MONEY - Richard Dyson

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

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