(This July 18 story has been corrected to clarify that 4.5 million pounds is an annual figure in paragraph 3 and removes reference to 'stacked layers' in paragraph 5)

By Krystal Hu

(Reuters) - U.S. vertical farming startup Plenty is forming a joint venture with Mawarid, a subsidiary of Alpha Dhabi Holding, in a $680 million deal to develop a network of indoor farms in the Middle East, the companies told Reuters.

The joint venture plans to build five farms in the region over the next five years. An initial combined investment of about $130 million by the companies will fund the construction of an indoor farm in Abu Dhabi that is expected to break ground early next year and could be up and running by 2026.

The farm aims to produce over 4.5 million pounds of premium strawberries annually for local consumption and export within Gulf Cooperation Council member countries.

Part of the financing also comes from debt provided by a local bank in the region, highlighting an unusual source of capital for the capital intensive indoor farming industry that has raised billions from venture capital investors.

Vertical farms in controlled indoor environments are promoted as a sustainable way to grow fruits and vegetables closer to the point of consumption while using less water.

The high costs associated with building new facilities have been a significant barrier to scaling production and funding for indoor farming has declined to just a fifth of its peak in 2021, according to PitchBook.

"We are targeting returns north of 20%, which is significantly higher than traditional agriculture. In that context, we think there's a lot of capital for the space," said Arama Kukutai, CEO of San Francisco-based Plenty.

Plenty said its United Arab Emirates farm's strawberry production has been pre-sold to Driscoll's, which dominates the market for berries in the region.

The partnership comes as the indoor farming sector is seeking new financial avenues to sustain growth. In early 2022, Plenty raised $400 million at a valuation of $1.43 billion, according to PitchBook. To date, Plenty has raised over $940 million from investors including Softbank and Walmart.

"We've been looking to bring food security into the UAE. We want to offer a solution which was able to deal with the issue of scarce land and scarce water, and could pivot to different crops if necessary," Mawarid CEO Kashif Shamsi said.