There has been a common assumption that banks dominate real estate lending but that is no longer the case.

Over the past decade, there has been a structural shift in global lending markets with banks intent on reducing their exposure in development, construction and transitional property financing. 

This has opened up significant opportunities for private lenders.

The drive in that growth is twofold.

It stems not just from investor demand but also from the unwillingness of banks to supply capital.

Why banks have become more conservative

The fallout from the Global Financial Crisis can still be felt today.

In its wake, significantly regulatory and structural pressures were enforced upon banks.

These measures were designed to limit their flexibility in an effort to avoid a repeat.

The Basel III Capital Requirements compelled banks to fund themselves with more equity, higher quality capital and stronger liquidity buffers in order to remain solvent during times of stress.

Higher capital buffers were also required for the funding of riskier loans.

These measures have had a flow-on effect on balance sheets and risk management. 

Balance sheet constraints 

• Banks must hold more capital against certain loans 

• Real estate development is considered to be high risk

Risk management 

• Banks prefer stabilized income-producing assets 

• They have less appetite for construction or value-add projects

The emergence of a lending gap

As bank lending fell for many types of real estate projects, gaps in the market appeared, specifically in the areas of:

• property development

• construction finance

• bridge loans

• transitional property assets

• value-add projects

Developers and investors still require finance to complete projects and the number of projects seeking capital has not diminished.

The by-product of tighter regulations on banks was the creation of an alternative market to fund these projects.

The rise of private credit

Private credit funds and other non-bank lenders are filling the void that traditional banks once serviced.

Tougher bank lending regulations, a rise in interest rates and a number of regional bank collapses have hastened the switch to private credit.

US private credit grew from $141 billion in 2013 to $853 billion in 2023.

The global private credit market now sits at around $1.7 trillion.

Banks comprised only 18% of Commercial Real Estate (CRE) funding in Q3 2024, falling from 38% 12 months prior.

That is because private credit funds:

• are not constrained the bank regulations

• are able to assess loans on a deal-by-deal basis

• offer more flexible structuring

• provide faster approvals compared with banks

Many real estate borrowers now actively prefer private lenders due to the speed and certainty of funding they provide.

The opportunity created

The gap in the market has created an enormous opportunity for private lenders.

Private lenders can:

• charge higher interest rates than banks

• lift rates if interest rates rise

• structure shorter-term loans

• secure loans with real estate collateral

• maintain conservative loan-to-value ratios

For savvy investors looking for an opportunity to diversify into private real estate credit, it offers:

• attractive income yields

• asset-backed investments

• exposure to real estate without direct ownership 

Is private credit an opportunity for you

The growth of private credit is not merely a trend – it is the result of a structural shift in global lending markets.

As bank lending continues to diminish in the CRE sector, private lenders and private credit funds will play an increasingly important role in financing property projects.

For investors seeking income and diversification, this has created a rapidly expanding investment category.

Critically, it can also be achieved with a minimum of risk.

Central provides a savvy property investment opportunity.

The Central Mortgage Income Fund (CMIF) is a California-focused private credit fund that originates and acquires real estate-backed loans giving investors consistent, risk-adjusted returns from short-term, senior-secured loans.

Get in touch to find out more.

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.