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I am a CFA and FRM Charterholder. I used to work as a Portfolio Implementation Manager for Aviva Investors managing Ā£3bn+in Assets Under Management in the UK. I am very passionate about educating people on how they can make more money with their existing investments sustainably.
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In this series, we cover all instruments, schemes and products in the alternative investment space available for Indian retail investors.
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FAAB Invest is launching FarmFraX, a fractional ownership model for agricultural land, offering investors rental income and potential capital gains.
The model provides detailed information about the land, including topography, soil, and water reports, ensuring transparency for investors.
The deal involves a Special Purpose Vehicle (SPV) and includes a 7% rental yield, with investors receiving interest payments taxed as per their income slabs.
The investment starts at INR 1.5 Lakhs, with a projected 16.2% IRR, though the deal is unregulated and involves related parties, posing certain risks.
While FAAB Invest has a good track record, potential investors should conduct thorough due diligence and be aware of the risks involved.
Agri-investing has always been a lucrative opportunity within the alternative investment ecosystem since the returns are mostly tax-free. However, the demand has decreased after SEBI froze the operations of Growpital (read a good article on this here), the most well-known agri-investment platform in this space. The Growpital issue remains unresolved, with SEBI and SAT still investigating what went wrong with the scheme it was running.
Amidst all this, Growpital's lesser-known competitor, FAAB Invest, continues to innovate by offering bigger and better opportunities to retail investors. Last year, we conducted an in-depth analysis of FAAB Invest, highlighting how their model differs from other platforms in this space. You can read it here.
FAAB Invest is set to launch a Fractional Ownership opportunity called FarmFraX for agricultural land soon. ALT Investor team got early access to its deal documents for an exclusive analysis. In this article, we will discuss their new fractional agri-land model, the pros and cons, and our suggestions for investors.
Just for readers benefit, FAAB Invest used to run a LLP model before where they would pool in a limited amount of money from retail investor to take agri-land on lease and provide high returns to investors over a 3Y period based on project performance. As per one of the founders, they have now stopped this model and completely pivoted to FarmFraX model. The existing investors in these deals are not impacted.
As per FAAB Invest, FarmFraX facilitates the fractional ownership of agricultural farmland, simplifying the acquisition and development of high-potential agricultural land. Investors in this deal will benefit from regular rental income and capital gains from the sale of farmland at a future date. FAAB Invest will manage the end to end deal for the investor making it hassle free.
In my opinion, the model is similar to the fractional ownership models offered by Hbits, Strata, AssetMonk, etc. FAAB Invest is just using agricultural land as the underlying asset instead of commercial property.
I generally don't invest in opportunities where I can't accurately assess the risk. I am especially cautious when it comes to investing in fractional ownership opportunities, as many factors can affect the price of land, commercial buildings, or residential homes.
However, FAAB's new opportunity in this model provides a wealth of information about the land being acquired. In fact, they have gone to great lengths to provide every possible detail about the land, such as:
Topography Plan
Soil Test Report
Water Report
Development Plans
Irrigation Plans
Legal Opinion on the land.
Valuation Reports
I always prefer having more information than none. It gives a complete perspective on the opportunity and shows that the team has genuinely put effort into evaluating it, rather than just pretending to.
Sorry about the small screenshots. Unfortunately, this information is only available on their mobile app, so the screenshots appear smaller. Please check their app for more details if needed.
Like every other fractional ownership transaction, there is a Special Purpose Vehicle (SPV) involved. FAAB Invest has set up a Pvt. Ltd. company for this transaction called Bogganpura Assets Private Limited, incorporated on June 6, 2024.
There are a total of 192 units available for INR 1.5 Lakh each, making the total deal size INR 2.88 Crores. Every investor who subscribes to even one unit will legally have a stake in the SPV. The SPV will use the money to purchase the land.
The investor gets 10% equity share in the SPV and the rest 90% money is used to allocate Compulsory Convertible Debentures (CCDs) to the investors. As per MCA rules, these CCDs necessarily need to convert into equity within a span of 10 years.
There will be a separate Asset Management Services Agreement between the SPV and FAAB Invest Advisors Private Limited.
FAAB Invest in turn will lease this land to Flosbela Garden Private Limited via a separate Agricultural Land Rent/Lease Agreement. As per Flosbela website, they are an agriculture company that uses advanced tech farming to produce high-quality, bountiful harvests year-round. Flosbela has been in the business for 6 years now.
You should be aware that FAAB and Flosbela are owned by Pera Thejas and Ashwin Anand (The founders of FAAB itself). The directors of Bogganpura SPV will beAravind R. and K R Arjun Nambiarwho are employees at FAAB.
As per Thejas, Aravind and Arjun will still actively be employed with FAAB in different capacities. They have been appointed as directors in the new company to ensure the integrity and proper governance of the directorship role. However, all significant decisions, such as asset acquisitions and sales, require the approval of 75% of the shareholders. The directors are only executing decisions taken by the shareholders and facilitating transitions decided by them. Furthermore, shareholders retain the power to remove directors through a majority vote.
For the asset management services FAAB Invest is providing to the SPV, it will charge a 2% asset management fees every year and 2% sale brokerage on the final value when the asset is sold.
For the leasing transaction, SPV will receive INR 20,16,000 as annual rent, which equals a 7% rental yield. This rental yield is paid out to the investors as 7.77% interest for the number of CCDs they hold of the SPV. Even if this is rent from an agri-land, the interest income will be taxed as per the slabs in the hands of the investor. Infact, the SPV will even deduct 10% TDS before making the interest payments.
The initial lease is for 5 years, but the agreement allows Flosbela & FAAB to extend the lease for another 5 years if needed.
They are projecting a 16.2% IRR for investors, assuming a 10% annual capital appreciation on the land and adjusting for roughly 2% sale brokerage at the end of tenure. Note that this is strictly a projection; the actual appreciation value may increase or decrease your IRR, so take it with a pinch of salt unless you are very familiar with the area where the land is located.
One of the members of the ALT Investor Community visited the farm in person to perform due diligence, and according to him, everything checks out. Here are the videos he shared in the group for the land in question.
After reading the agreements and studying the product page on the app, here are some of the questions I asked the founders about, you might be interested in some of these as well, click on every question to read the answer
Transparency: There is tons of detailed information available about the land, all conveniently available within the app. The agreements are also quite good and standardized. All major decisions within the SPV need atleast 75% shareholders approval.
Minimum Investment Amount: The investment starts at INR 1.5 Lakhs which is reasonable for this kind of deal and its size. Generally other FRE platforms ask atleast INR 10 Lakhs as minimum investment.
Good Track Record: FAAB has a good track record so far fulfilling their repayments schedule on their previous model deals. Investors also have location of the farms in the previous deals and have visited them without any issues. This was not the case with its competitor Growpital.
Too many related parties: Every party involved in this deal i.e. Bogganpura, FAAB Invest, Flosbela have one thing in common, the beneficial owners are mostly Thejas and Ashwin. I hope they do not take advantage of related party transactions and move profits from one place to another to advantage or disadvantage investors. Not trying to make any allegations but an arms-length distance is important to maintain but very difficult to exercise in practice.
No Increase in Rent Amount: I don't like the fact that they have given themselves the power to extend the lease contract by 5 years but haven't mentioned anything concrete on rent amounts increasing. It would be a bad deal for investors if the rental amounts are not increased again.
Unregulated Deal: Goes without saying but this is an unregulated deal and farming land will not fall under the remit of the new SMREIT regulation. But Thejas and team are hoping that Farming REITs will be launched soon by SEBI.
Credit Risk: There is not enough information available on Flosbela as an entity since they are the ones who will be making the rental payments. If for some reason they go bankrupt, investors will have to find another tenant to replace them. They will miss out on rental yields during the time there is no tenant.
To conclude, FAAB Invest's new FarmFraX model presents a decent opportunity for investors looking to diversify into agricultural land. The model offers some tax benefits, transparency, and a relatively low entry point, making it accessible to a broader range of investors. Personally, I will be buying 1 unit of this opportunity purely from an experimentation point of view. This is money which I am comfortable losing if things go wrong.
However, potential investors should be conscious of their risk appetite and aware of the risks in this deal which we have mentioned above. While FAAB Invest has a solid track record, the unregulated nature of this investment adds an element of risk. As always, thorough due diligence is essential before committing to any investment.
Thank you for reading this article so far. We are on a mission to build out great content and community in alternative investment space in India, if you would like to join our Whatsapp Community where we regularly discuss ideas and clear doubts, please apply via the below link.
Please note that this is an opinion blog and not official research advice. I am not a registered RIA in India, and none of these views reflect those of my current employer. This blog aims to promote informed decision-making and does not discourage you from investing in any deals.
We plan to come up with more blogs discussing different types of instruments available in the world of startup investing, write on due diligence for some platforms, and also existing and upcoming alt investment deals in the Indian market. If you want to stay updated on the latest blogs, please subscribe to our newsletter so you get notified automatically.
Thank you for reading and hope to see you in the next one!
