The company that Jerry built

AT JAITHIRTH ‘JERRY’ RAO’S modest, no-frills corner office on the third floor of HM Strafford House in Vasanthnagar Extension, Bangalore, the mantra is basic. Rooms are kitted out with standard furniture and a home-style rooftop café serves idlis. It isn’t quite what you associate with this high-profile banker-turned-entrepreneur, 61, still identified with his successful stint in the IT sector after 25 years in Citibank. (He set up MphasiS, which became one of the top 10 IT firms in India, and then sold it, in 1998, to EDS Technologies for $380 million, or Rs 2,351.8 crore at current rates; he also headed the IT industry body, Nasscom.)

Rao’s plans for his real estate firm, like his office decor, don’t resemble those of a big-ticket real estate mogul—no super deluxe apartments or Italian designers. His Value Budget Housing Corporation (VBHC), which started three years ago “to serve a social purpose and be profitable”, intends to make good-quality homes affordable for thousands of people: a housing version of the Maruti 800.

For Rao, chairman, selling customers their first-ever homes was a big draw. “What’s the point in private banking sales or selling people an accounting product?” he asks. “It’s a bore dealing with the well-heeled who nitpick about a Rs 100 fee.”

VBHC signed on institutional investor HDFC, equity fund India Financial Inclusion Fund, and PE player Carlyle Group and raised Rs 220 crore in all from them between 2009 and 2011. Carlyle owns 25%, HDFC had 10% (now 7% to 8%), and Rao and his team some 40%. Among those who joined Rao were former Citibank colleagues like P.S. Jayakumar, now VBHC’s managing director.

The company builds apartments in peri-urban (between the suburbs and the countryside) areas where land is cheap. As the infrastructure isn’t well-developed, sales could be slow. Rao and his team had worked in evolved and regulated sectors such as banking and financial services, which follow global best practices. So, they weren’t prepared for the curveballs real estate threw them. VBHC has missed its target of 14 projects, completing only four; its unit prices have shot past the planned Rs 5 lakh to Rs 10 lakh range to between Rs 15 lakh and Rs 25 lakh. Rao is disappointed, but the lessons imbibed are changing how he looks at the business.

LEARNING NO.1 IS THAT budget housing isn’t a priority for the central and state governments. In his banking circles, ‘inclusion’ may be the buzzword to harness the vast expanse of unbanked money, but in real estate, Rao found that government policy discouraged affordable housing. VBHC could, if it wanted, make money faster by selling large, plotted developments to the rich. Panchayat permission to build 5,000 sq. ft. farmhouses on two acres of land in Panvel, Maharashtra, takes 15 days; permission for apartment blocks on that land takes two years, says Rao. These are “anti-inclusionary housing measures” in a country where the majority desperately needs affordable homes. “Why are we making it easy to build large farmhouses but not lower- or lower-middle-class housing?” he asks.

The second lesson is that real estate is swamped in legalities that don’t get rescinded when new laws are instituted. “You just keep painting on the same canvas,” Rao says. In banking, old rules are rendered obsolete when new ones are created.

Projects greater than 20,000 sq. m. require approvals from the town planning authorities, the municipal corporation, the district commissioner, the fire department, civil aviation, minor irrigation, electricity board, sewerage department, and the environment ministry. “It’s an incentive to keep projects under 20,000 sq. m.; but the economies don’t work out well and the pricing skyrockets,” says Rao.

Jayakumar, who headed consumer banking at Citibank, says all businesses have surprises, and a company adjusts accordingly. “But if a [project] file gets held up, you’re stuck.” In Karnataka, 17 approvals are needed to start a project, and another 17 to end. Most of them are sequential. “You can’t even dig the land till you get all 17,” says Rao. So, capital costs accumulate. “Earlier, I would say that land is like working capital and I don’t want to build a land bank,” adds Rao. “I’ve been proved wrong.”

VBHC tries to devise strategies to work around the delays. Pramod Kumar, director with VBHC, says its catalogue of standardised designs for bathrooms, kitchens, etc., helps save time otherwise lost waiting for approvals. “Now that we have six projects onstream, we find it works very well.”

Anita Arjundas, CEO, Mahindra Lifespaces, says “inefficiencies in the system reward some developers”. For instance, when land value goes up three to four times while waiting for approvals, many take advantage of this to make a windfall: They jack up unit prices, instead of focussing on quality or finishing projects quickly.\

Land is what VBHC, too, keeps clocking interest costs on. The Reserve Bank of India’s rules don’t allow banks to lend to builders to buy land as it could cause a speculative rush. Rao agrees it’s the right policy in principle. But that means VBHC has to lock up equity capital in land and pay huge returns to its PE partners, even as it watches costs to prevent an escalation. “One knew this—but the intensity hits you when you get into the business,” says Rao.

Lesson No. 3 for Rao and his team was about regional preferences among buyers. Bangalore’s Hindus won’t buy south-facing apartments as the direction is associated with death. But in Tamil Nadu, they can fetch a premium as people want houses that catch the thendral, or the cool southern breeze that finds mention in Tamil poetry. With 10% of VBHC’s buyers being single women, Rao says that even a feature like vibrant-coloured stone in the kitchen can make their eyes light up. “One assumes the bells and whistles are unimportant when pricing is low. But they aren’t,” he says.

Lesson No. 4: The major bottleneck for permissions could be at the tehsildar’s (revenue administrative officer’s) office. In Thane, Maharashtra, Rao found that no bylaws had been published. Only the four architectural firms there have copies of circulars issued in Marathi and Hindi. So all developers have to go to one of them.

When Rao entered the sector, he brought with him many ideas from banking and IT. Pradeep Bijur, the former chief information officer of VBHC, recalls him saying: “I want best in class processes and systems. Budget is not a problem.” Facial biometric reader systems at project sites help identify workers, and sensor-based software systems indicate how fast the concrete is drying. Its reverse auction platform (to allow vendors to bid) saw at least 5% savings on purchases.

RAO IS PLAYING IN A FIELD where larger brands haven’t had much luck. Tata Housing announced Rs 4 lakh flats in 2009 and Mahindra Rs 10 lakh homes, but neither has delivered. VBHC has delivered 840 apartments in Bangalore and aims to deliver 308 more soon. In Bhiwadi, in the NCR region, it sold plotted developments and is now selling flats. These projects aren’t moving at the pace Rao would like—it’s the same with his Mumbai and Chennai projects.

But here’s the thing about Rao. He isn’t getting bogged down by the laws and red tape. “This is my last venture,” he says, making it clear he’s spending the rest of his time building VBHC.