Why Private Credit is Gaining Popularity in Real Estate Financing

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Private credit is witnessing unprecedented growth in India, and its impact on real estate financing is profound.
Traditionally dominated by banks and non-banking financial companies (NBFCs), the Indian real estate sector is
now increasingly turning to private credit as a viable alternative for funding.
This shift is driven by regulatory changes, market dynamics, and the inherent benefits of private credit as an asset class.

The Shift in Financing Dynamics

Historically, banks and NBFCs were the primary sources of funding for real estate developers in India.
However, the landscape began to shift post-2018, during the IL&FS crisis.
The Reserve Bank of India (RBI) imposed stricter regulations on lending for land acquisition and project approvals, significantly reducing the flow of traditional credit.
This created a funding vacuum, which private credit has effectively begun to fill.

According to a 2024 report by Knight Frank, private credit in India’s real estate sector has grown by over 35% annually in the past five years.
The market size of private debt globally is projected to reach $2.8 trillion by 2028, and India’s share is expected to rise significantly due to its burgeoning real estate market.

Why Private Credit Appeals to Real Estate

Flexibility in Structuring: Unlike traditional loans, private credit offers customized structures that align with project timelines and cash flows. This flexibility is critical for real estate developers who often face delays due to regulatory approvals or market conditions.

Faster Disbursement: Time is of the essence in real estate projects, and private credit funds are known for their expedited decision-making and disbursement processes. This agility provides a significant edge over conventional funding sources.

Higher Risk Appetite: Private credit funds are willing to take on higher risk for projects with strong fundamentals but perceived as risky by traditional lenders. This has opened avenues for developers of niche projects, such as co-living spaces and senior housing.

Attractive Returns for Investors: Private credit investments offer higher yields compared to liquid credit alternatives. With base rates elevated globally, investors find this asset class increasingly appealing.

Key Trends in India

Growth in Alternative Investment Funds (AIFs): AIFs have become a significant player in private credit. SEBI-registered AIFs raised over ₹2.2 lakh crore by mid-2024, with a substantial portion allocated to real estate.

Focus on Tier-II and Tier-III Cities: Developers in these cities often face challenges accessing traditional funding. Private credit has emerged as a lifeline, fueling growth in underpenetrated markets.

Green Financing: With increasing focus on sustainability, private credit is supporting eco-friendly real estate projects, which are now a priority for both developers and investors.

Real-Life Impact

An illustrative case is the funding of a large-scale residential project in Pune. Traditional lenders hesitated due to the developer’s limited track record. However, a private credit fund structured a deal with milestone-based payouts and equity conversion rights. The project is now on track for timely completion, benefiting both the developer and the investors.

Challenges and Risks

Despite its advantages, private credit is not without risks. The higher yields come with the potential for defaults, especially in a volatile real estate market. Additionally, the lack of transparency in some deals and limited regulatory oversight can pose challenges. However, with robust due diligence and a focus on projects with strong fundamentals, these risks can be mitigated.

The Road Ahead

Private credit is poised to play an even larger role in India’s real estate sector. With the government’s push for infrastructure development and urbanization, the demand for innovative financing solutions will only grow. As an asset class, private credit offers a win-win for both developers seeking flexible funding and investors looking for higher returns.
In a rapidly evolving financial landscape, private credit stands out as a resilient and dynamic force, driving growth and innovation in Indian real estate. Its rise underscores the sector’s adaptability and the growing appetite for alternative funding solutions, marking a new era in real estate financing.

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