Properties, Homes & more

Jerry Rao, founder of IT firm Mphasis, is completely immersed into his next business innings: Nano housing. Just like the Nano car, he wants to deliver homes to buyers looking for affordable homes: including drivers, housemaids, plumbers and electricians. Jerry Rao’s new venture, Value and Budget Housing Development Corporation, is targeting building a million homes in 10 years in 17 cities.

In an exclusive interview to Economic Times, Jerry Rao said, unlike conventional developers, his business model would treat land as an inventory and not a capital asset. If he is able to roll out his project and deliver in 12-18 months, the returns would be in the region of 30-40% almost similar to what the IT industry enjoyed in its dream run. Excerpts from the interview:

Interviewer (I): After IT, banking and angel investing, what made you think of housing?

Jerry Rao (JR): I could retire and do nothing. At 57, I have got at least another 5 to 10 years to do something else. I did want to stay away from IT and banking and wanted to do something of scale. I looked at agribusiness, education, health care and it seemed to me that I could leverage my IT and project management skills in housing. And, there was no paucity of demand. So, you could scale this business and create a big impact.

I: What is the difference between your business model and how conventional realty operates?

JR: Unlike conventional realty, we want to think of land as inventory and want to sell it as soon as we can. That is the basic difference that sets us apart. I thought it would be a high risk model. But, the downside here is very low. We are using equity to buy land. We will have access to construction finance and then we also get 25% down payments from buyers. So, even if the project goes bust, we can still repay all the loans and also repay equity. But, if we get it right and build and sell the project in 12-18 months, then the return on equity will be in the 30-40% range. It is actually quite an attractive place to be in.

I: Then, how come nobody else has entered the space?

JR: Why did nobody create a low-cost detergent before Nirma? The high-cost market was profitable enough. One, it is partly a supply side problem that people do not re-engineer. Two, the middle-class and upper-class segment, Rs 0.50-1 crore, has been very profitable. Three, if you are looking at land as a capital asset, you would not do it. This model requires a mindset shift.

Do not forget to read PART 2 of the interview…

At around 5:30am on June 30, an unoccupied building still under construction at Palm Beach Road in the New Mumbai district of Mumbai city Shanghai and not Sanpada (Please read UPDATE published below) toppled over. One worker was killed. According to information, a 70 meter section of the flood prevention wall in nearby Creek Stream which connects with Arabian Sea collapsed that may have something to do with this building collapse.

God bless all who have and are suffering in this accident…

Please note that I have received this information through a mail, so I am not responsible if this information is incorrect. If you have latest update on this, please post it here and I would certainly publish it. Let’s spread only the right information.

UPDATE: I have received many comments from alert readers who have pointed out that this information is partly correct. This accident had really took place, but in Shanghai (check this BBC link) and NOT in Sanpada as reported by me. I apologize for the wrong information I had published. I am against spreading any rumours so I am taking all precautions to avoid such things to happen, and also upading my post. Thanks again to my alert readers.

The much awaited garden on top of Parsik Hill in Belapur (Navi Mumbai) will finally be thrown open to the public on Wednesday, June 17. This garden is spread across a generous 4,000-sq mt expanse built on top of a new water reservoir on the hill.  It will be inaugurated by NCP chief Sharad Pawar.

Offering a breathtaking panoramic view of the entire satellite city, the garden is already being referred to as the ‘Hanging Gardens of Navi Mumbai’. With Navi Mumbai slowly becoming a concrete jungle, the garden is surely going be a welcome change. There are also planns to set up telescopes along the periphery of the garden.

According to the city engineer of the Navi Mumbai Municipal Corporation (NMMC), Mohan Dagaonkar, the reservoir below the garden is part of the Kalamboli-Digha pipeline project, which was undertaken by the NMMC along with Pratibha Industries to ensure an uninterrupted supply of water to the city. This spot was chosen because it is one of the highest in the city. The water that will be brought here from Morbe Dam will be transported through the new pipes mostly by gravity, thus saving a lot of electricity. The water tank will handle nearly 32 million litres of water every day, and will supply the same to various parts of the city.

According to the developer of the garden, it will have drooping creepers and a waterfall, which will add to its beauty. Apart from the high vantage point, from where we will get a lovely view of the city, the garden will be useful for morning walkers and fitness buffs.

The government is working overtime to fulfil its promise of providing affordable, low-cost homes to low-income-groups (LIG) still seems to be a distant reality. Though the government and developers are working hard towards lowering housing costs, cost of the most important ingredient — material costs of construction — is just not coming down. Although the government, in an effort to rein in the prices of construction material, announced a service and excise tax cut on cement prices, they continue to remain high.

Land prices contribute towards the cost of any project in Mumbai but the construction cost is quite substantial too. The cost of RCC is a major component, 2/3 of the total cost of construction. Any rise in cement or steel prices directly impacts the end pricing. Some 15 years ago, the price of cement was around Rs 60 a bag, now it is Rs 270. This increase has been totally unjustified - and this is just one component. Steel prices have come down in the last few months, but those too were fluctuating on the higher side. These are those components that one simply cannot reduce or compromise with in any way during construction.

The ongoing price hikes of cement have hit the construction industry hard. It is no secret that cartelisation in the cement sector is keeping prices unnaturally high, they would prefer to reduce production rather than reduce prices. Other materials like bricks, steel, mortar, and machinery also play a major role. Transportation of the material too contributes 25-30% to the cost of the project, which must come down. One option to have control over prices is buy in bulk to take advantage of the material prices - but even in this case the quality parameters remain the same. It is too expensive to import cement from other countries due to depreciation of the rupee. It is strange when all other raw material prices have come down; cement prices have gone up. Thanks to this, the increase in cost of construction is up to 10%.

In order to help reduce prices effectively and encourage fair pricing the government needs to appoint a more powerful regulatory body to check the demand and supply of raw materials, completely ban export of cement, remove the countervailing tax completely to make import easy so that domestic prices remain under control and bring in more transparency in working of these systems.

In order to realize the grand dream of affordable housing and massive infrastructure growth, the cost of the most important ingradient - construction material - must come down substantially. (Ref: article published in the Times of India)

In the last few months, the government has been pressing for affordable housing. However in the middle of election and economic slowdown, the measures have been nothing but half-hearted. Although the government, in its effort to arrest increase in the prices of construction material, announced cuts in service and excise taxes on cement prices, they still continue to remain high. Steel prices too are fluctuating. However, if the dream of affordable housing has to be realized, such frequent fluctuations in the prices of cement & steel must be controlled. In fact, the government should ensure stringent and effective measures to keep the prices at a sustained level to make the dream a reality.

According to some developers, the desperate need for infrastructure development has increased the demand of the construction material and its impact is felt on the housing projects as well. While in metros like Mumbai land prices (which have always been at a premium) contribute substantially towards the cost of the project, the cost of construction too constitutes a substantial fraction of the total cost. The housing sector consumes 55% of cement, while the infrastructure sector eats up 35%, and the balance 10% goes into other cement products. The ongoing price hikes of cement have hit the construction industry hard.

Now with the housing industry experiencing a slowdown, the capacity utilisation of cement plants, which has gone down to 86% in 2008-2009 is set to go down further during Q1 of this year due to the likely addition of 28.55 million tonne capacity. Cement firms are producing blended cement by adding 25% of fly ash to Portland cement. This actually reduces the production cost, which is NOT passed on to the consumers.

Steps needed to control price increase

With the increasing trend of mass housing, builders are coming up with newer technologies to reduce costs. The new projects have redefined the housing industry. The designs, use of vitrified tiles, polymer paints, paved areas, luxury amenities have upgraded the final output of the products contributing to the increase in costs. Also a few years ago, there were only G+4 or G+7 FSI, but now with high rises, costly technology is required, resulting in the steep increase in prices. Supplementary forces like labour and transport add up to the cost. But introduction of new technologies, which have reduced labour cost, is possible only in case of huge housing projects. For a builder investing in such technology is expensive.

Though government is laying down certain policies it should try to regularise one door clearance of documents to avoid the builders running from pillar to post to get their documents in place in time. To encourage the construction industry, VAT on cement and RMC (Ready Mix Concrete) should be brought down to four per cent. Most important, the government, the builders and manufacturers need to work closely.  To help reducing prices effectively and to encourage fair pricing, the government needs to appoint a more powerful regulatory body, completely ban the export of cement, remove the countervailing tax completely to make import easy so that domestic prices remain under control and bestow more power to the MRTP commission in order to be able to take strict action against the offenders and bring in more transparency in working of these systems.

What developers are doing to arrest spiralling prices?

According to a builder, the major factors for the increase in cost of construction are the raw materials, cost of TDR (transfer of development rights), increasing interest rates, government delay in clearances of various projects. In order to control cost, some developers have already started making efforts to procure raw materials in time, minimize wastage, have better information system, better negotiation for pricing of raw materials and use of ERP software to keep costs in control. Developers need to maintain a systematic construction schedule, stock raw materials, arrange work force and other daily requirements to minimise expenditure.