Properties, Homes & more

<< Jerry Rao’s interview on creating low cost housing the professional way

Jerry Rao, founder of IT firm Mphasis, wants to deliver low-cost good-quality homes to buyers like 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. Excerpts of an exclusive interview with ET, Jerry Rao (JR) defends his new mantra…

Interviewer (I): How will you address the backend challenges? Your buyers constitute the unbanked part of the population!!

JR: There are two big demand-side challenges. One, unlike in Manila and Sao Paolo, where poor and rich neighbourhoods are far away, in Indian cities, the poor live inside the city. Now, we are giving them housing far away. So, there is a commute cost and a commute time. That is a demand-side dampener.

The second is they may want to buy but how many of them will qualify for a loan. That certainly reduces the size of the market. But, believe me, these people have the ability to downpay Rs. 50,000 to Rs. 1.5 lakh. These people live frugally and save a lot. Over time, we believe the system will be in a position to offer 15-year mortgages in the Rs 2-8 lakh range.

I: What is your assessment of the buyer profile?

JR: They may be poor but they are upwardly mobile - these are NOT the absolute destitutes or the pavement dwellers. What they want is to get out of their present shanty / to a more secure place. They want compound walls, security, indoor toilet and privacy. Most want their children to go to English medium schools. The target buyer is someone, who has an income and also high labour mobility so that even if he moves to the city outskirts, he would get a replacement job pretty quickly. Like a driver or high-skilled construction worker.

--- As told to the Economic Times ---

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…