Introduction
A developer breaking ground on a residential tower in Pune rarely writes one cheque to cover the project. The land was bought with promoter equity and a bit of structured debt. Construction is running on a mix of bank term loans and customer advances. And the last floor of funding, the piece that closes the gap between what a bank will lend and what the project needs, increasingly comes from a non-bank lender that most homebuyers have never heard of.
That layered structure is the real story of real estate financing in India. It is not one product. It is a stack, and each layer has its own lender, its own price, and its own risk appetite. Understanding how that stack works matters for IFAs and MFDs advising clients into real estate-linked products, and for HNI and family office investors deciding where in that stack they want exposure.
The Capital Stack Behind Every Real Estate Project
Every real estate project in India draws on four broad sources of capital, layered by risk and cost.
- Promoter equity: the developer’s own capital, first to absorb losses, last to be repaid.
- Structured equity or mezzanine debt: hybrid capital that sits between equity and senior debt, often used to fund land acquisition before construction begins.
- Senior secured debt: bank and NBFC term loans against the project, typically the largest single piece of institutional funding.
- Customer advances: pre-sale receipts from buyers, which fund construction once a project has regulatory approvals and sales momentum.
Mezzanine debt and structured equity carry higher coupons than senior debt because they rank behind it in a default. They are also the layer where private credit funds have built the sharpest expertise, since pricing that risk correctly is a specialised underwriting skill rather than a commodity lending decision.
Bank and NBFC Lending: The Traditional Backbone
Banks remain the largest source of formal real estate credit in India, and the scale is significant. Credit outstanding to housing (including priority sector housing) touched a record ₹27.23 lakh crore in March 2024, up from ₹19.89 lakh crore in March 2023 and ₹17.27 lakh crore in March 2022, according to RBI data on the sectoral deployment of bank credit.
That is close to ₹10 lakh crore of growth in just two fiscal years, tracked in RBI’s sectoral deployment of bank credit data, and it tells advisors two things: housing credit demand has stayed structurally strong through a high-rate cycle, and banks have kept underwriting standards tight enough that growth has been funded rather than just refinanced.
Commercial real estate credit, the segment that funds office, retail and industrial developers rather than individual homebuyers, stood at ₹4.48 lakh crore in March 2024, up from ₹2.97 lakh crore two years earlier. That is where the financing gap tends to widen, because banks are more conservative on construction-phase commercial lending than on completed, income-generating assets.
This is the gap NBFCs and housing finance companies were built to fill. But since the 2018 IL&FS default and the wider NBFC liquidity squeeze that followed, banks and NBFCs alike have pulled back from higher-risk, early-stage construction finance. That pullback created room for a different kind of institutional lender: the SEBI-registered Alternative Investment Fund.
Where AIFs and Private Credit Fit in Real Estate Financing
Alternative Investment Funds have become the fastest-growing institutional route into Indian real estate credit. Total AIF commitments across all categories reached ₹15.74 lakh crore as of December 2025, a 21 per cent increase over ₹13.05 lakh crore a year earlier, according to SEBI data.
Category II AIFs, the category that houses most real estate private credit and structured equity strategies, led that growth with ₹11.64 lakh crore in commitments, up 16 per cent year-on-year. The full breakdown is in SEBI’s AIF activity reports.
Real estate is not a side allocation within this pool. It is the largest single sector by AIF investment. Real estate investments by AIFs reached a record ₹1.29 lakh crore as of March 2026, up sharply from ₹75,350 crore at the end of December 2025, according to SEBI data reported by Business Standard. That quarter-on-quarter jump reflects how quickly capital is rotating into structured real estate credit and equity as banks stay selective on construction-phase risk.
The mechanics of how this capital reaches a developer are worth understanding for anyone evaluating a Category II real estate fund. Structured credit vehicles typically lend against a specific project or a portfolio of projects, secured by a mortgage on land or under-construction inventory, with covenants tied to construction milestones and sales velocity rather than a single balloon repayment. That milestone-linked structure is what allows a private credit fund to price and monitor risk that a traditional term loan structure handles less precisely.
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Private Equity’s Shifting Role in Project-Level Financing
Private equity capital, distinct from private credit, takes an ownership stake in a project or platform rather than lending against it. This segment has moved in a different direction over the past five years. PE investment in Indian real estate fell to USD 3.7 billion in FY25, down 43 per cent from USD 6.4 billion in FY21, according to Anarock Capital data, driven mainly by reduced foreign investor activity amid global macroeconomic uncertainty.
What has changed within that smaller pool is more telling than the headline decline. The number of deals dropped from 51 in FY24 to 39 in FY25, while average deal size rose from USD 75 million to USD 94 million, per Anarock. Foreign investors still supplied 84 per cent of FY25 PE capital versus 16 per cent domestic, and logistics and warehousing captured the largest share of deal value in FY25, a segment where institutional capital has consistently favoured long-lease, income-generating assets over speculative residential development.
For financing purposes, this matters because PE capital has effectively concentrated at the top of the market: fewer, larger, better-governed platforms with institutional-grade reporting. Mid-market and Tier II developers who cannot meet that governance bar have limited access to PE and lean more heavily on structured private credit instead, which is one reason private credit AIF activity has scaled faster than PE in the same period.
The Financing Gap Nobody Talks About: Stalled and Affordable Housing
Formal credit growth tells only part of the story. India had more than 4.5 lakh stalled affordable and mid-income homes across over 1,500 projects as of 2024, requiring roughly ₹55,000 crore in funding support, according to an ANAROCK Capital report on India’s real estate finance transformation.
The government-backed SWAMIH Fund, launched in 2019 with a corpus that expanded to ₹15,530 crore, has enabled completion of nearly 58,600 homes so far, with SWAMIH Fund 2.0 adding a further ₹15,000 crore blended-finance vehicle in the 2025-26 Budget. That gap between formal bank credit and what stalled projects need is precisely the segment where structured private capital, deployed with the right risk controls, has room to do more than government vehicles can cover alone.
Why the Financing Mix Matters for Advisors and Investors
For an IFA or MFD positioning real estate-linked private market products, the practical takeaway is that not all real estate exposure carries the same risk profile. A senior secured construction loan behaves very differently from a mezzanine structured credit position, which behaves differently again from equity in a logistics platform. Advisors evaluating a manager’s real estate strategy should ask where in the capital stack the fund lends or invests, not just which broad label it carries.
For investors, the same discipline applies to portfolio construction. IRR, or internal rate of return, and MOIC, or multiple on invested capital, are the two metrics that matter most when comparing real estate private credit or equity strategies, since a high IRR on a short-duration structured credit deal and a high IRR on a multi-year equity platform are not measuring the same kind of risk. Historical, sourced fund performance can be evaluated on this basis; what a manager can promise about future returns cannot.
Conclusion
Real estate financing in India runs on four layers of capital, not one, and each layer has repriced differently since 2018. Bank credit to housing has scaled to a record ₹27.23 lakh crore even as underwriting has stayed disciplined. Private equity has consolidated into fewer, larger, institutional-grade deals. And Category II AIFs, carrying the bulk of India’s private credit and structured equity activity, have become the fastest growing and now single largest sector by AIF investment, at a record ₹1.29 lakh crore as of March 2026.
For advisors and investors alike, the opportunity is not in choosing real estate as an asset class in the abstract. It is in understanding where a specific fund sits in that capital stack, what it is lending against, and how its historical performance was earned, before evaluating it as part of a diversified portfolio.
