Few weeks ago, on my way to office, noticed advertising hoardings from VBHC for 1BHK apartments at $13,500 (5500000 INR) & 2BHK apartments at $27,000 (1250000). Price tag of these apartments was big surprise and as an entrepreneur i started wondering about their business model.
I decided to spend some time & understand their business & economics behind it. Here is my analysis.
Like in many cities, real estate business in bangalore too has strong links with not so good people (Unethical, Greed etc). So first thing i looked at was,
who is the promotor of VBHC ?. I found that "Jerry Rao" is the promotor and HDFC investment arm holds minority stake in VBHC. As i work in the software industry, i knew that jerry rao was the founder of Mphasis (He sold Mphasis to EDS) and he was also served as chairman of NASSCOM. VBHC project was launched by HDFC chairman "Deepak Parekh". When multi billion dollar satyam scam emerged, Minister for Corporate Affairs constituted new board for satyam and "Deepak Parekh" was one of the three board members. I am convinced that i am dealing with good builders.
2) Business & economics.
Lets understand how typical real estate business works in India.
- Builder purchases land - With his own money or via loan.
- Builder starts construction using conventional methods - Most builders take loan for construction to mitigate their execution/business risk.
- Builder completes 60% of construction. - Interest incurred on the loan during this period will be passed on to consumers.
- Builder starts marketing. - Interest incurred on the loan during this period will be passed on to consumers.
- Builder couldn't sell (as the market is competitive) or Builder didn't want to sell (expects demands will be high) - More interest incurred on the loan, again it will be passed on to consumers.
Based on various parameters (number of units being constructed, capital strength of the builder, market demand etc) typical construction duration is between 2 to 3 years.
Lets look at how VBHC is building,
- VBHC purchases land.
- Constructs model houses, starts marketing.
- Completes more than 95% booking before actual construction starts. Construction cost is paied by consumer in chunks along with progress of the construction. VBHC completely avoided their major business risk - "selling to consumer", even before the construction started.
- Construction completes within a year.
In their current project, VBHC is building ~1800 units. This large volume of units allows them to bargain more from their raw material suppliers. VBHC is clearly trying to distrupt conventional housing business with "Build large number of units & Build quickly."
When VBHC told me that they will construct all ~1800 units with a year & 3 months, i was surprised as i thought it is nearly impossible with conventional construction method (It is equivalent to thinking "5 ladies together can deliver a baby in just 2 months"). They showed interesting method for construction - "Western Forms". As i wan't aware "Western Forms" way of construction elsewhere, I questioned about usage of the same technology elsewhere. The sales guy replied that the technology provider has successfully used the same construction methodology on multiple hosuing projects in mexico and many commercial projects in NA.
VBHC is targeting urban middle class with their vision of "a million homes in 10 years". Affordable 2BHK flats along with in-campus CBSE school, grocery shops & primary health center, certainly the valuation (based on location of the project, price tag, team, amenities, safety, community living, return on investment) of VBHC Vaibhava project looks attractive.