There is a common perception that investing in property means direct ownership of property or development projects.

But that doesn’t have to be the case.

Real estate capital is structured in layers, each with differing risk and return profiles.

The concept is known as a ‘capital stack’ and investors can participate at different levels depending on the returns they seek and the risk they are prepared to tolerate.

The real estate capital stack explained

Think of a capital stack as similar to a pyramid.

At the top lies rock solid senior secured debt.

Every level below that top layer carries a higher level of risk with potentially greater returns, all the way to the bottom of the pyramid where speculative investors seek the largest returns with high-risk development equity.

The typical structure of a capital stack for a real estate project looks like this:

Senior debt

• First claim over the property

• Paid before any other investors

• Secured by mortgage

• Lower return but the highest level of security

Mezzanine debt

• Subordinated to senior debt

• Higher yield but greater risk than senior debt

• Often used to increase leverage

Preferred equity

• Hybrid structure

• Priority return ahead of common equity

• Remains exposed to property performance

Common equity

• Ownership of the project

• Highest potential returns

• Greatest risk if project underperforms

If a project sustains losses for whatever reasons, those losses flow upwards from the bottom of the  stack.

The common equity holders stand to lose all of their investments and are paid last when often, there is nothing left.

Conversely, senior lenders are paid first and historically have recoveries in the range of 65-80% in default scenarios.

How senior secured lending is structurally protected

Senior lenders enjoy the most protected position in a capital stack for the following reasons:

First lien security over the property – They are paid before mezzanine lenders, preferred equity and common equity. It is that equity which acts as a buffer for senior lenders.

Collateralized by real assets – The loan is secured by the property itself via a deed of trust. Senior lenders have the legal right to enforce the loan if default occurs.

Conservative loan-to-value ratios – Typically in the area of 55-70%. A Debt Service Coverage Ratio (DSCR) of more than 1.2-1.5x offers a vital buffer before principal is impaired.

Lender-friendly California laws –  In California, foreclosures proceed without court involvement facilitating speedier recoveries.

Control in distress – Senior lenders can appoint receivers to manage a distressed property, opting to sell or restructure to achieve the best possible outcome.

Income control – Many loans include cash management structures triggering a rent sweep in the event of performance decline, forcing income to debt service first, rather than flowing to the borrower.

Repricing ability – Senior lenders may issue short term loans (1-5 years) with floating rates, giving them the option to reprice and protecting them from long-term market shifts.

These factors all combine to offer senior lenders the greatest protection.

An example of a real estate capital stack

Imagine a $1 million property is financed by a senior loan worth $650,000 with $350,000 of borrower equity.

Property values could fall by 35% before senior lenders face any loss exposure.

It gives senior lenders significant downside protection relative to equity investors who face some degree of loss if the market falls by even 1%.

Why institutional investors allocate to private credit

Institutional investors such as pension funds, insurance companies and sovereign wealth funds have been steadily increasing allocations towards private credit.

The sector has surged in recent years, rising from $2 trillion in 2020 to $3 trillion in 2025 and is projected to reach $5 trillion by 2029.

They are doing this because private credit offers a mix of income, downside protection and strong structural advantages that are difficult to replicate elsewhere.

The key drivers of the shift have been:

Institutional investors seeking a stable yield – private real estate credit typically offers higher yields than public bonds.

Downside protection – Investors seeking a defensive position covet the safety net of first claim on income and assets and value lower volatility than equity markets.

Asset-backed investments – Private credit investment is backed by tangible assets.

Shorter loan durations compared with equity holdings – Loans are typically 1-5 years allowing capital to be recycled faster. The ability to reprice rates also provides protection against inflation.

Reduced bank lending – Opportunities in the space have been created because banks have pulled back from Commercial Real Estate (CRE) lending due to regulatory pressure, balance sheet constraints and office exposure concerns.

Perfect timing – The combination of higher interest rates, lower property values and less competition creates a perfect storm and makes it a golden opportunity to be investing in CRE.

Where private credit fits into a real estate portfolio

Private real estate credit is a sensible and strategic consideration for investors seeking to expand their portfolio for the following reasons:

• Diversification away from equities

• Lower correlation to public markets

• Income generation through stable yields

• Asset-backed exposure

Private credit offers greater yields with downside protection and lies somewhere between bonds and property equity in a diversified portfolio.

That is because: 

• It generates stable income with contractual returns (loan coupons) that outperform bonds but unlike bonds, is secured by real assets

• It has exposure to property cycles like real estate equity but is much less volatile and has a lower correlation with equities like the S&P 500

• While being income-oriented like bonds, the ability to reprice with a floating rate often increases income when bond prices fall

The trade-off for these features is reduced liquidity which investors accept in exchange for higher yields, stability and access to private deals.

Your next steps

Real estate offers multiple investment entry points but not all property investments carry the same levels of risk.

Senior secured real estate lending provides exposure to the property market through income-producing debt rather than ownership which is why its appeal has grown so rapidly among sophisticated investors.

Remember, senior debt carries the lowest level of risk in the capital stack and offers multiple levels of protection.

Central is opening up opportunities with private credit for investors.

To learn more, get in touch.

This analysis is based on comprehensive market data and industry research. Past performance does not guarantee future results. Investors should conduct their own due diligence and consult with qualified advisors before making investment decisions.