What it takes to make real estate development financing work

GlobalData

Tue, Apr 8, 2025, 10:11 AM 4 min read

Traditional lenders, constrained by regulatory pressures and rising risk aversion, have scaled back, creating a financing gap that only sophisticated private credit providers are stepping in to fill.

Several compounding factors are making it increasingly difficult for developers to access funding:

• Rising debt costs: Higher interest rates have made traditional bank loans more expensive, squeezing margins and challenging project viability.

• Tighter lending criteria: Banks and mainstream lenders are becoming more cautious, pulling back on financing for projects with perceived risks.

• Inflation and construction cost volatility: Fluctuations in material and labour costs complicate budgeting and forecasting, deterring conventional lenders.

• Planning and regulatory bottlenecks: Lengthy approvals and growing local opposition cause delays, adding uncertainty and financial strain.

• Maturing debt pressures: A wave of existing loans requires refinancing, but with banks retreating, developers are left scrambling for alternative funding.

Amid these headwinds, private credit providers with deep real estate expertise are increasingly stepping in. Unlike traditional banks, these lenders offer flexible, tailored solutions, drawing on sector-specific knowledge to assess and de-risk projects more effectively.

Many are backed by high-net-worth individuals, family offices, and institutional capital, allowing for innovative financing structures. The growth of private credit has been remarkable. Global assets under management reached approximately $1.5trn at the start of 2024, up from $1trn in 2020, and projections suggest this could climb to $2.6trn by 2029 (Source: Preqin). This surge highlights the sector's rising importance in filling the gaps left by traditional banks, especially during times of economic uncertainty.

Once perceived as an expensive last resort, private credit’s evolving structures are becoming more competitive. Rising traditional lending costs have narrowed the pricing gap, while mechanisms like back-leverage, blending senior financing with alternative debt to optimise returns, are enhancing affordability for developers.

In the current lending environment, traditional credit metrics alone are no longer sufficient. Lenders must adopt a more holistic approach, integrating real-time market insights and a deeper understanding of project risks to make informed underwriting decisions.