In an ever-evolving real estate landscape, private credit has emerged as a transformative financing alternative, bridging gaps left by traditional banking systems. Offering tailored solutions, expedited funding, and attractive yields, private credit has gained significant traction among investors seeking indirect exposure to the real estate market without the complexities of property ownership.
This comprehensive guide explores the fundamentals of private credit, its advantages and risks, and key trends shaping its growth in 2025. Whether you’re an experienced investor or exploring this avenue for the first time, this guide provides valuable insights.
What is Private Credit in Real Estate?
Private credit involves non-bank lending, where institutional or individual investors directly finance borrowers. In real estate, private credit typically supports:
- Construction Projects
- Acquisitions
- Renovations and Repositioning
Unlike traditional bank loans, private credit deals are often customized, offering borrowers greater flexibility and faster capital access.
Types of Private Credit in Real Estate
- Mezzanine Debt:
Positioned between senior debt and equity, offering high returns with moderate risk.
- Bridge Loans:
Short-term financing to bridge gaps, such as transitioning from construction to stabilization.
- Distressed Debt:
Investments in undervalued or non-performing loans, yielding high returns upon recovery.
- Preferred Equity:
Combining fixed dividends with downside protection while capturing equity-like returns.
Why Private Credit is Thriving in 2025
Private credit’s popularity stems from several factors:
- Tighter Banking Regulations:
Stricter capital reserve requirements have limited traditional lending to riskier real estate projects, creating opportunities for private credit.
- Higher Returns:
Private credit offers annual returns ranging from 10-18%, significantly outpacing fixed deposits or traditional bonds.
- Urbanization and Infrastructure Growth:
India’s urban population is projected to reach 600 million by 2030, fueling the need for innovative real estate funding solutions.
- Tailored Financing Solutions:
Developers increasingly seek flexible, bespoke financing options.
Global Private Credit Market Trends
The global private credit market is on a rapid growth trajectory:
- 2024 Market Size: $2 trillion
- Projected 2028 Market Size: $2.8 trillion
Key Drivers:
- Alternative Assets: In a volatile macroeconomic environment, investors prioritize higher yields.
- Asia-Pacific Growth: India and Southeast Asia are leading the growth in private credit deals.
- Technological Advancements: Proptech innovations are enhancing risk assessment and deal efficiency.
Private Credit in Indian Real Estate: A Booming Market
India’s real estate sector, contributing 7% to GDP, is poised to grow to $1 trillion by 2030. Private credit has played a pivotal role, with $7.8 billion invested in 2024, a notable increase from the previous year.
Key Growth Drivers:
- Regulatory Constraints: RBI restrictions on traditional land financing create a fertile ground for private credit.
- Affordable Housing Initiatives: Programs like PMAY and Smart Cities have increased demand for financing across segments.
- Urbanization Surge: Tier-1 cities like Mumbai, Bangalore, and Delhi NCR, along with Tier-2 hotspots like Pune, Surat, and Coimbatore, drive real estate activity.
How Private Credit Works in Real Estate
- Loan Origination:
Developers approach private credit providers for project-specific funding.
- Due Diligence:
Investors evaluate feasibility, market conditions, and borrower creditworthiness.
- Loan Structuring:
Terms such as interest rates, repayment schedules, and collateral are customized.
- Monitoring and Servicing:
Loan performance is tracked to ensure compliance and mitigate risks.
Advantages of Private Credit for Investors
- Attractive Returns:
Annual yields averaging 10-18%.
- Portfolio Diversification:
A unique asset class offering diversification beyond equities and bonds.
- Short Investment Horizons:
Investment durations of 2-5 years, offering faster liquidity.
- Secured Investments:
Loans are often backed by real estate assets, reducing downside risk.
- Inflation Hedge:
Real estate-backed loans align with inflation trends.
Risks and Mitigation Strategies
Risks:
- Credit Risk: Borrower defaults due to project delays or financial instability.
- Market Risk: Real estate market volatility impacts collateral values.
- Liquidity Risk: Limited secondary market for private credit investments.
- Regulatory Risk: Policy changes affecting real estate or lending practices.
Mitigation Strategies:
- Conduct thorough due diligence.
- Partner with experienced investment managers.
- Diversify investments across regions and sectors.
Key Trends Shaping Private Credit in Real Estate in 2025
- Rise of Alternative Investment Funds (AIFs):
AIFs are increasingly managing private credit portfolios.
- Technology Integration:
Proptech tools streamline processes and enhance risk assessment.
- ESG Alignment:
Investments in sustainable and green projects are gaining momentum.
- Emergence of Tier-2 and Tier-3 Cities:
Smaller cities like Nagpur and Lucknow are becoming investment hubs.
- Increased Participation from UHNIs and Family Offices:
These groups are driving private credit growth in India.
Why Arbour Investments Leads in Private Credit
At Arbour Investments, we specialize in private credit solutions tailored to the dynamic needs of India’s real estate sector. Our proprietary Asset Evaluation and Management System (AEMS) enables meticulous assessment and strategic alignment, ensuring sustainable value creation for our investors.
With a focus on transparency and innovation, we have consistently delivered:
- Superior risk-adjusted returns.
- Diversified investment portfolios.
- Deep insights into market dynamics, supported by decades of expertise.
Conclusion
Private credit in real estate is revolutionizing the way developers and investors approach financing. In 2025, its significance is amplified by regulatory shifts, urbanization trends, and the need for flexible, innovative funding solutions.
For investors, private credit offers an unparalleled opportunity to achieve high yields, diversify portfolios, and hedge against inflation. However, success in this segment requires a keen understanding of risks, a strategic approach, and trusted partnerships. At Arbour Investments, we are committed to empowering investors with insights and solutions that redefine real estate investments. By fostering transparency and innovation, we aim to shape the future of private credit in India’s real estate ecosystem.
