Low cost home solutions from Jerry Rao

Business Standard ran a super profile of Jerry Rao. After moving from Mphasis he ahs set up this firm called Value and Budget Housing Corporation Ltd.

His Business model is to sell homes in the range of Rs 5 lakh to Rs 11 lakh. How does he plan to do it? There are three broad strategies:

• Deliver the house in quick time like 18 months. Don’t sit on landbank and wait for prices to appreciate like other builders. So be lot less greedy.
• Use technologies which lower completion time. So they use technology which cures concrete in 2 days instead of 21 plus days used by others
• Reverse engineering – Once he decided on the price he worked backwards to understand and lower the development costs. Just like Tata Nano project. Based on Rs 5- Rs 11 lakh apartment, flat cost around  Rs 1300 – 1400 per sq. ft. This implies land cost around Rs 300 per sq ft and infra costs around Rs 800 per sq. ft. And so on…

Interesting bit.

How he came at housing sector after selling Mphasis?

The original intent was to build a scalable business and not a small boutique outfit focused on domestic consumption and targeted at the base of the pyramid. I looked at various things and saw that there is such a gap in housing,” says Rao. Indeed, there is no single national player in the value-housing segment; the regional players have little to offer below Rs 30 lakh (Rs 3 million).

Rao spent nearly six months trying to understand why most builders are not in this space. “My conclusion is that the economics of the business favours large scale because most builders are not really developers but land-bank players. They make their principal profit on land appreciation. Buildings are an incidental part of the business,” he holds forth.

To let value appreciation set in, most developers deliberately delay their projects. Buyers don’t complain because they too see a rise in the value of their assets.

Another reason for delay is no penalty. As a buyer if you miss one payment to a builder, you are charged just like credit cards. However, they can keep delaying their projects without any penalty.

Based on his ideas, first project has started in Bangalore called Vaibhava. he is also using economies of scale and building more homes to bargain better from suppliers of kitchen sinks, ceramic tiles etc.

As the projects are low cost, they are far from the city. So city infrastructure remains a major hindrance:

The problems, however, are aplenty. The first is the location. If you want to price your flat at Rs 5 lakh (Rs million), you are naturally on the outskirts of the city. Compounding this is the lack of transportation infrastructure, the cost of which will be added to the family’s monthly installments.

“Until the government acts fast on the public transport, the 25-million gap in value housing demand is only theoretical and not effective. People will just not move 30 km away from a city and will continue to stay in rented housing even if it’s sub-standard,” Rao says.

This is quite true. In Mumbai we see the same thing. Though, nothing is within the range Rao is offering (budget homes here mean Rs 30 lakhs) but one does not know how to reach workplace from there, Builders are trying to entice buyers by offering all kinds of amenities in these far-off places like swimming pool (where Mumbai suffers from water problem), gymnasium (who has the time) and so on. So you have building ads showing happy family, swimming pools etc but nothing on how to reach office from there. One needs more than 1 hour to travel 5 kms in near to office  homes and here we are talking about building homes something like 50-60 kms away from most likely work places.

How about financing options? There is some innovation here:

Another challenge is access to mortgage. Getting long-term housing loans at an affordable rate of interest isn’t easy.Many prospective buyers of low-cost houses either do not have the right type of proof of income or do not have the desired employment profile to access loans from banks and housing finance companies. Since these borrowers are committed to repaying the loan, they need support, particularly at the initial stages, for accessing mortgage loans.

Rao has a solution for this. “We along with our sponsors will enable financial inclusion by providing partial financial guarantee to banks or housing finance companies. Simultaneously, we are working with reputed lenders to provide loans based on partial guarantees.”

Apart from demand there is supply side problem as well:

While there are issues on the demand side, there is no dearth of problems on the supply side as well. The documentation of land records, especially in the outskirts of any city, is in pretty bad shape. To make matters worse, approvals from 16 government agencies are required before one can start work on the land.

“It is a time-consuming process and everything moves sequentially, not parallely. The level of transparency is changing, but there are some fundamental issues like access to electricity, water and sewage that remain,” he rues.

The biggest purchase item for most, does not have any clarity. It is like just pay and don’t ask any questions.

Finally, how does he aim to prevent speculators?

With his houses aggressively priced at Rs 5 lakh and above, won’t the project fall prey to speculators in the market and not reach the actual consumers who are in need? Rao admits that this is a big problem and it is difficult not to sell when someone comes in with a cheque to buy a flat.

“Our understanding is that not many investors will come for flats of 350 square feet and 450 square feet. They may come for the 600 square feet units. Given the nature of our products, speculative resellers are few; even in a worst-case scenario, they are not the ones who will come in and stay in a 600 square feet flat,” he reasons.

I checked this issue with another reputed builder as well. He said we are ensuring no one sells the house before possession and take all money in cheques. That does away with some bit of speculation.

And going by Navi Mumbai experience, he must ensure no airport comes up wherever he is building a project. Otherwise, God only save his low cost home idea!!

Great to see someone like Rao taking up this very important cause. It is a pity that most houses these days are being built for either high income or pushing people into taking bigger loans. Then there is just too much speculation and investment activity making it difficult for a first time buyer. Each year he earns some surplus and makes modest salary gains, the prices have moved up much further. Most people say, buying houses creates a hole in your pocket and one needs to be prepared. True, but it should not mean you loose your pant altogether burdened with loans.

The entire economics of residential homes has gone for a toss. On top of that we have such a pathetic urban development policy with no basics at all. Some people like Rao try and offer low cost homes but because of infrastructure issues find few serious takers. It is a problem of plenty and no one seems to be interested in addressing it.

Rao plans to scale his model into other cities like Delhi, Mumbai etc. It will be interesting to see his offerings in Mumbai and whether he can stir some much-needed competition in this area.

All the best Mr. Rao!

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