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<< 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…

<< Opinions of other builders

With just a week to go before the new government is formed, developers point out what needs to be done to boost the real estate industry.

Abhisheck Lodha, director, Lodha Group, says, ”The wish list will revolve around two sets of things. Firstly, the continuation of the overall development and liberalisation of the economy and secondly, streamlining the regulations and clearance process to reduce the time lapse in starting the project. It should also aim at making such policy measures that boost low-cost housing. Lowering of interest rates is a gradual process but the government should work on making the market more transparent, encouraging private sector participation and act on policy level to make a difference.”

Besides these, developers repeatedly emphasise on simplification of taxes on construction materials like cement, steel and other essential commodities. With cement prices escalating at Rs 260 to Rs. 300 a bag, mass housing could remain a dream feel developers. Land regulation is under the jurisdiction of the state government, but the central government issues policy directions from time to time which are not always followed by the states. The central government has to see them being followed through measures like conditional funding, as they have done under the JNNURM scheme. Similarly, cement cartelisation must also be controlled.

The government should clearly define whether the units should be sold on carpet area or any other parameter. Whatever the case may be there has to be a clear-cut definition of the saleable area with no scope for ambiguity. The formalities of acquiring a home should also be simplified. It is only in this way that the industry could be freed from its continuous cyclical boom and bust scenarios and the supply could be absorbed by a larger number of people. The rate of stamp duty also needs to be drastically reduced and made uniform across states.

Many builders unanimously recommend better regulation and widening the scope for foreign direct investments, and encouragement of REIT and REMF as it is only through these measures that real estate will be able to attract the large amount of money that is required for the kind of development we are envisaging for future development. It should allow foreign buyers to invest in commercial property as FDI is one of the greatest contributors in the real estate sector.

With just a week to go before the new government is formed, developers point out what needs to be done to boost the real estate industry…

The past two years have been eventful for the real estate industry, which saw unprecedented highs and unimaginable lows, all within a very short span of time. But while the world and India started sinking into the recession, the Government recognised that the real estate industry has been one of the primary drivers of the economy — it carries almost 200 small and medium industries and contributes 4.5% to the GDP with a potential to contribute much more. In a week from now as India gets set for a new government, the real estate industry has drawn up a comprehensive wish list for growth and development of real estate on a sustainable basis.

Niranjan Hiranandani, MD, Hiranandani group and one of the pioneers of the modern real estate industry says, “For the past 60 years the government has only focused on ‘roti’ and ‘kapda’. While that is still very important, it has to also focus on ‘makaan’ with equal zeal. A house is the third most basic necessity for human survival and the industry an indicator of a nation’s prosperity as a whole. Certain procedures have to be simplified and more cooperation is needed to make mass housing possible. Secondly the industry is labour-oriented which can generate a huge amount of employment, contributing hugely to GDP. Hence the government has to look at real estate industry more seriously.”

Ram Yadav, head, finance and strategy, Orbit Corporation says: “We have moved into a different era as the real estate industry has turned more professional, sophisticated and enterprising. It has acquired respectability. While the onus is on the developers to bring in global standards and transparency, the government has to play its part in simplifying the process of clearances by providing a single regulatory body and uniform laws across the country as the business has now become big enough to attract foreign money.”

What other builders wish from the new government >>