In this fast paced world of real estate development, your investment decisions can make or break an opportunity. Whether it’s acquiring, developing or repositioning a property, the financial decisions you make have a direct impact on the timeline and flexibility of your returns.
For decades, the traditional lending institutions have been the primary choice for developers and institutional investors. However, with the introduction of private credit funds, a dynamic alternative that gained significant traction in the industry. But which avenue is a better choice for you – Private credit funds or Traditional Lending?
What are Private Credit Funds?
Private credit funds are a form of lending that is provided by non-traditional financial institutions like investment firms directly to investors and developers. These funds surpass the limitations of traditional banks that have to follow and bridge the gap between traditional financial solutions and investor’s interests.
These funds are typically raised by institutional investors, family offices and are used to finance projects with customized lending structures. These funds have the freedom to operate with more flexibility and can offer investors faster returns, flexible timelines and innovative deal structuring that can be customised to their project needs. This agility has made private credit funds more attractive and has become the preferred mode of financing for many investors and developers.
Traditional Lending, The why’s and why not’s:
Traditional lending institutions such as bank institutions, government backed institutions operate with a structured framework to provide standardised loans with relatively lower interest rates. These lending institutions have been the first choice for low-risk borrowers who function under strict regulations.
However, these lending procedures can be long, need detailed documentation and have rigid qualification criteria. Although these funding choices can be right for a straight forward investment, they are proven to be less flexible for high risk investments and time-sensitive deals.
Why Private Credit Funds in real estate?
The upsurge of private credit funds has provided the investors with an agility and flexibility in their investment decisions that were restricted when borrowed from traditional institutions.
- Speed in execution:
Surpassing the bureaucratic processes, private credit providers can take faster decisions and provide funds at a speed that is unmatched when compared to traditional lenders.
- Customisable solutions:
Private credit providers do not have to follow strict regulations and have the liberty to provide customised solutions to individual borrowers depending on their project specifications. This flexibility is beneficial for complex projects that require creative financial solutions.
- Asset-Based lending:
Private credit funds do not rely on borrowers credit worthiness unlike traditional lenders, they rely on the asset’s value. This makes them a perfect fit for opportunistic real-estate investors.
- Higher risk tolerance:
Private credit providers fund projects that usually fall outside traditional underwriting models, which often means higher interest rate. This gives investors an opportunity to fund unconventional projects.
What is a better fit for you?
Both private credit funds and traditional lending play an important role in the shaping of the industry. But the choice of which is a better fit for you depends on the investors interests and project specifications.
The factors on which you could make that decision are:
- Timeline of the project
- Risk appetite
- Complexity of the project
- Timeline for returns
Many seasoned real estate developers and investors often choose a combination of both depending on their project. Securing traditional loans for stable assets and acquiring private credit funds for transitional and high growth ventures.
While traditional options still play an important role, private credit in real estate is no longer just an alternative, it has become a core component in designing your financial choices for real-estate investors.
