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The UK stock market is filled with real estate investment trusts (REITs). By making money through these alternative financial vehicles, investors can indirectly own high-yielding assets that are often as expensive as direct investments.
Many REITs own and operate a portfolio of commercial or residential properties. However, others focus on other assets, such as renewable energy infrastructure.
Although fossil fuels are not going away anytime soon, the growing threat of climate change is driving more investment in renewables. And even the new British government aims for the creation of 650,000 clean energy jobs by 2030.
With that in mind, I look at two REITs that look set to thrive under the renewables regime, Greencoat UK Wind (LSE:UKW), and Foresight Solar Fund (LSE:FSFL).
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Wind and solar REITs
Both firms have almost identical business models. They invest in renewable energy infrastructure (wind for Greencoat, solar for Foresight), produce clean electricity, and sell it to energy suppliers.
The steady and increasing demand for electricity has enabled both companies to generate more cash. And both have benefited greatly from the sharp rise in electricity prices over the past few years. As a result, dividends have been increased for nine years in a row, keeping pace with inflation and helping shareholders build smaller earnings.
This trend should continue, in my opinion. As mentioned earlier, the demand for energy is increasing due to the growing popularity of electric vehicles (EVs) and power-hungry artificial intelligence (AI) models. Needless to say, this could be a lucrative opportunity, attracting private sector investment, even if Labor falls short of its targets.
What could go wrong?
Looking at the rest of the renewable REIT space, these two stocks seem to offer incredible value. While operating as profitable businesses, both generate enough cash to comfortably cover interest and dividend expenses. And to spice things up, both are trading at a double-digit discount to their net asset value, indicating a potential buying opportunity.
Obviously that is a motivating factor. As much as I've already added Greencoat to my income portfolio, I have plans for Foresight to join the mix when I have more money. However, these investments, although promising, are not without risk.
Like most businesses operating within the energy sector, neither Greencoat nor Foresight has pricing power. Electricity prices are determined by imbalances in supply and demand while monitored by regulators such as Ofgem. And because of that, energy has been a cyclical sector.
When energy prices fall, the returns of these REITs fall as well. And while management teams can hedge prices with fixed-price customer contracts, long-term declines in energy prices could threaten profits, especially if debt is left unmarked in a high-interest-rate environment.
However, both businesses seem to be in a strong position right now. And with a strong track record of navigating fluctuating market conditions, it's a risk I feel is worth researching, given the potential long-term income it could unlock.
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