Small housing projects too can make big profits, says Jerry Rao

Small housing projects too can make big profits, says Jerry Rao
The Economic Times, June 16, 2009, Page 5

J Padmapriya BANGALORE

JERRY Rao, the iconic founder of IT firm Mphasis, is completely immersed into his next business innings: Nano housing. Just like the Nano car, he wants to work backwards from his sub-Rs 7 lakh price point to deliver homes to a varied buyer profile that includes 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 ET, 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:-

After IT, banking and angel investing, what made you think of housing?

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.

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

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.

Then, how come nobody else has entered the space?

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. I have no interest in the land price whereas the entire development of last 30 years has been based on land price appreciation. A developer may be building 60 flats but he will sell only 20 in the initial phase, wait for a year and sell the next 20 at double the price and so on. He is not in a hurry. Once you start looking at land as an inventory, it is a completely different scenario. That is the way Karzanbhai Patel must have thought. Instead of looking at a detergent as a middle class or upper class product, he looked at it as a cleansing agent any housewife could have. Nano again is an interesting example. They set the price and worked backwards. They did not say we will make it and sell it cost plus.

How will you address the backend challenges? Your potential buyers constitute the unbanked part of the population?

There are two big demand-side challenges. One, unlike in Manila and Sao Paolo, where poor and rich neighbour hoods 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, you will be amazed at the number of people who have saved up and can put down Rs 50,000 to Rs 1.5 lakh. So it reduces their borrowing. People are frugal and they have saved. In the long run, credit access is going to be an issue although initially, we do not see that as a problem. Over time, we believe the system will be in a position to offer 15-year mortgages in the Rs 2-8 lakh range.

What is your assessment of the buyer profile?

They may be poor but they are upwardly mobile. Let us get it clear, these are not the absolute destitutes or the pavement dwellers. They are buying aspirations. What they want is to get out of their present shanty, slum kind of dwelling 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. This model is not a solution to the entire homeless problem of India.

If you prove that this model is profitable, do you think other realty players will crowd this space?

Yes. We want to make money. There is a vested interest in that. If we get in and make a 5% profit, nobody will be interested. If we are profitable, then many more will enter and the whole sector will gain legitimacy. It is not meant to be a not-for-profit/NGO model.

What does the project road map look like?

The company will initially set up two projects in Bangalore. We would then move nationwide. Our project sizes would be in the range of 8-50 acres. Typically, in 20 acres, one can build 2,800 to 3,200 units sized between 300 and 450 sq feet.The first equity round will be Rs 50 crore essentially to fund land acquisition. We are currently in the process of raising the capital. We will tie up with several MFIs to target buyers with credit access and use regional building contractors. The big demand is in Mumbai and NCR. We have to get there sooner. In Mumbai, people are willing to accept smaller flats and they do not mind commuting but land prices there are higher. We are also in the process of setting up a housing finance institution. We are studying the guidelines for the same as a housing finance company has to be separate from the development company. We are working on how to get a separate set of investors to drive it.

Realty is also the unreformed part of the economy? How will you tackle things like black money, corruption?

We are very clear. We pay for all our lands in cheque. We won’t buy it if it is not on those terms. For us, land is just one of the inputs. We are not looking for government subsidy, grant or any regulatory exceptions. We don’t want anybody to acquire land and give it to us.