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Saturday 25 February 2017

Property is back in fashion, but there are other assets available

Brian Tiernan

Property and renewables are both favoured for investment
Property and renewables are both favoured for investment
Property and renewables are both favoured for investment

When the wind blows and the sun shines, there is money being made. But how do renewables stack up against bricks and mortar as an investment option?

Sometimes it feels like there is only one option for excess cash in this country - invest in property. Our recent past, however, has made us wary of putting all our eggs in the property basket. Renewable energy is a real alternative in investment terms, and represents a viable way to diversify. It offers a steady return over a medium term, typically 8.5% for a direct investment in solar for example, and of course it has the moral kudos.

It's relatively new to us, however, and lack of knowledge makes us cagey. To help close that knowledge gap, here's a cheat sheet on renewables. I'm deliberately ignoring the moral or environmental argument so as to compare them simple as asset classes.

Renewable energy has fixed, predictable income streams. Rates are usually underwritten by government feed-in-tariffs, which provide price certainty. The government guarantees a price of energy for the producer. In Italy, for example, where Solar 21 has its solar farms, we are guaranteed a price for each unit of energy we produce for the next 20 years.

Government support for renewables will increase. Global agreements like the one achieved at COP21 in Paris in December will mean more, not less, support in the future. Not everyone was thrilled with our own government's white paper on energy, which was finally published in December, but it is indicative of the commitment global governments are making to reduce dependency on fossil fuels.

There are minimal operational costs once a renewable energy project is up and running. If you think about it, wind and solar farms have a free supply of raw materials.

Like property, you can see your investment. You are buying a piece of a wind or solar farm. You can physically visit it.

There is an increasing demand for electricity. You're investing in the generation of electricity. You know it will always be in demand.

Accessible. Through companies like Solar 21, Greenroom and Greenman, individuals can invest in solar or biomass farms easily with the help of their financial adviser either through a self-directed investment structure or directly.

There are downsides though. For a start, like any technology there is the potential for obsoletion. This is important given the long-term nature of the investment. Having said that, the pace of technology innovation has been slowing in recent years translating into lower costing assets. According to a recent KPMG report, the costs of solar fell by 80% from 2008 to 2013.

Renewable energy assets need on-going investment. Revamping, improving and maintenance prolong the lifespan and increases the efficiency of the assets. That said, solar parks have two main components - the solar panels and the inverter - limiting the maintenance required and the possibility of things going wrong. There is little need for the owner to be involved.

Regulation is evolving, which may lead to some uncertainty.

Now for property. Having lived through the property crash, we may all need some reminding of what property as an asset class actually has going for it.

It's familiar. The oldest asset class, everyone is familiar with property, particularly in this country where it is a bar-stool and dinner-table staple topic of conversation.

There are many ways to do it. REITs (Real Estate Investment Trusts - a tax-efficient way of investing in property), self-administered pensions, direct investment; there are many ways to dip into property investment depending on how hands-on you want to be.

It has the prospect of capital appreciation. However, that swiftly spoken line that goes at the end of all financial services radio ads also applies here - the value of your investment may go down as well as up. The myth of always increasing house and commercial property prices has been shown to be just that - a fiction - in recent years. Property is beholden to economic cycles like most asset types.

The proeprty market is regulated. Regulation around property is mature and only changes incrementally and generally for the good - for example, laws on building energy efficiency, health and safety, the use of noxious materials (asbestos, pyrite) and so on.

It's tangible. Property is a physical asset and there is some psychological comfort in the 'bricks and mortar'.

There is a demand for it. There will always be a need for homes, offices and commercial buildings.

Of course its not all sweetness and light. For a start, there are a lot of costs involved with being a landlord.

There are taxes and fees associated with property: stamp duty, local property tax, rates and so on. The expenses do not stop there. Though we probably all had some landlords in our student days to whom this point did not seem to have occurred, over the life time of the investment it will be necessary to make capital investments to refurbish and modernise it.

It can also go wrong. Like every major purchase, it's a case of caveat emptor. There is a risk that your investment could be at risk from poor building standards or materials - just look at the case of Priory Hall or the pyrite estates.

A bargain is not always a bargain. Location with property is everything. Two words: ghost estates.

If location is everything, timing counts for a lot too. As I pointed out earlier, despite upward-only rent reviews, return on investment is not guaranteed. Vacancy rates for office buildings in Dublin, for example, were 23pc in 2010 according to CBRE. During a down turn the value and rental income of property are both hit.

Property can be vulnerable to government intervention. We've already had the mortgage rules, which appear to have cooled demand for residential property. Berlin has introduced a law prohibiting landlords from charging new tenants more than 10pc above the local average to combat the fastest rising rents in Europe. Rent caps are a real possibility here.

So is there a winner here? Property and renewables have a lot in common but there are some features of renewables that make them the winners for me.

For a start, we're good at it; in Ireland we have the greatest wind energy resources in Europe. Solar? Well, that's another story. But there are plenty of places, southern Italy for example, where there is no shortage of sun.

Property rental income is an unknown, affected by economic cycles which increase in value in good times and reduce in times of recession. Renewable energy projects on the other hand offer predictable returns over the lifetime of the investment. But it needn't be a case of one or the other.

Ultimately, any good financial adviser should be offering you alternatives so that you can diversify. Property and renewables are uncorrelated asset classes, so having them both in your portfolio will protect you from over-exposure. When one goes up, the other goes down.

Look, there are plenty of signs that property yields are on the up - rents are inexorably rising, by 9pc nationwide in 2015, according to a recent Daft survey. New home building is lagging behind what the experts claim is necessary - and a lack of supply means one thing for the investor - return on investment. But for investors looking for a long-term, balanced portfolio, it is worth remembering that renewable energy investment offers a stable, government-underwritten return.

Brian Tiernan is an investment analyst with Solar 21, which is the investment adviser and asset manager to Greenroom Investments.

Sunday Independent

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