Jerry Rao's Housing Venture Raises 2nd Round From IFIF

September 14 2010, 12:35:49 IST | J PADMAPRIYA & SHRIJA AGRAWAL; Source: VCCircle

With this deal, IFIF, which follows a mandate to invest in MFIs, has diversified its sectoral base.

Value and Budget Housing Corporation, the low-cost housing venture backed by Indian IT poster boy Jerry Rao (founder of Mphasis which was sold to EDS), has raised a second round of funding of Rs 17.3 crore from India Financial Inclusion Fund (IFIF), an India-focussed fund that invests in microfinance entities and MFI enablers, sources familiar with the development told VCCircle. 

IFIF is advised by Hyderabad-based Caspian Advisors Pvt Ltd, which also manages the Bellwether Microfinance Fund (Bellwether). With this investment, IFIF, which till now followed a mandate to invest primarily in MFIs, has diversified its sectoral base.

As of March 2009, India Financial Inclusion Fund’s size had risen to $58 million after having raised $20 million in fresh capital. 

Set up in Mauritius in August 2008, IFIF is an off-shore fund focussing on equity investments in companies that are directly or indirectly associated with bringing about the inclusion of the poor within the formal financial system. Its other investments include  Micro Housing Finance Corp. Ltd, Sonata Finance Pvt. Ltd, Sahayata Microfinance Pvt. Ltd.,Ujjivan Financial Services Ltd., A Little World Pvt. Ltd and Equitas Micro Finance India Pvt. Ltd.

The low-cost housing firm, which recently launched its maiden project Vaibhava (in the Rs 4.5 lakh to Rs 10 lakh price band for 354-640 sq feet units) in Bangalore’s Electronic City suburb, already has HDFC as a strategic investor with 10% stake at the entity level. Besides, HDFC PMS will invest between 25% and 49% at the project SPV level on a case-to-case basis. In the first project too, HDFC PMS is an investor at the SPV level.

Declining to be drawn into details of the second round of funding, Jerry Rao, chairman of VBHC, told VCCircle, “We are open to raise private equity funding. We intend to build 1 million homes in 10 years and PE funding will form a part of financing the plan.”

When contacted, an IFIF spokesperson confirmed the deal but declined to divulge details such as quantum of funding and valuation.

The firm is targeting cities such as Chennai, Hyderbad, Nashik, Pune and NCR apart from a second project in Bangalore in its first phase of growth. VBHC--whose other co-founders are P.S. Jayakumar (formerly Consumer Banking Head, Citibank) and Sunil Narayan (leading real estate specialist)-- will plan projects in the urban periphery and well connected to the city’s central transportation system. Each of the projects will have an on-site English medium school, working women's centre, day care medical centre and a local shopping complex. 

VHBC would be looking at deploying funds for land assets and would raise project finance for construction work. Unlike regular developers, it will not depend on customer pre-sales to fund the project.

“We are acquiring land only for specific projects. Land-banking is not part of our strategy,” Rao says on the different approach followed by his firm. Conventional developers typically accumulate land assets at historic values and construct and sell units much later reaping unbelievable returns on account of land value appreciation.

The sub-Rs 7 lakh housing segment typically works on an end price formula of Rs 1,500 per sq feet. The economics has to be worked backwards as cost of construction and infrastructure (at Rs 900 per sft) are more or less fixed. The idea is to procure land in such locations, mostly in the city periphery with some economic activity, to meet the end price band. Bangalore is also emerging as a test bed for nano-housing ventures. This year, Ramesh Ramanathan, founder of Janagrahaa, launched a low-cost venture in the city under Janaadhar Constructions, an affordable housing project promoted by Janalakshmi Social Services.

In a recent chat with VCCirle, Jerry Rao talks about VHBC’s business model and new approach to real estate development. Excerpts:-

What is the typical profile of your consumer?
After we launched our Bangalore project, we got more than 1,000 visitors and have sold 60 units so far. There is a lot of interest from the market. Typically, the customer has to make a down payment of 20% to qualify for a loan. We assume a variety of people would be interested in the product such as those working in the IT/BPO sector, self-employed people and so on. It is quite possible that a high-profile person buys a unit for a poorer kin or an entry-level IT employee invests in it although the assumption is that the target market is from the base of the pyramid. So, who buys it and who rents it will also vary from project to project. What we are trying to do is to increase the housing stock in the country.

What are the key approaches that you are following in your real estate venture?
One, we are a profit making company. Two, we want to buy land and get rid of it soon and not sit on it. Three, we use modern technology to reduce construction cost and time. Four, we are fixated on completion schedules. Five, we are totally transparent in disclosures such as carpet area etc. Six, we should be able to offer a return on equity of 20-30%. We are not looking at 100%.

What is your view on land-banking?
Land bank is not part of our strategy. For specific projects, once we identify land, we commission the survey, negotiate with the landlord, examine the legal issues and go ahead with construction. So far we have not done any joint development.