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This shift marks a significant change in developer financing. Builders are increasingly turning away from traditional customer payments and bank loans towards private credit, which, while more expensive, offers greater flexibility for their funding needs.
Why Developers Need Private Credit
Demand for private credit in India's real estate sector is rising sharply, directly tied to falling residential property sales. Lenders see deal pipelines growing by 10-20% as developers struggle with cash flow shortages from slower buyer payments. These funds are crucial for land acquisition, approval fees, and ongoing construction. Anand Lakhotia of Motilal Oswal Alternates confirmed a "healthy increase in deal pipelines" and anticipates a "meaningful uptick" in private credit for housing projects. The overall market is projected to expand from $1 billion annually to $2-3 billion, with India expected to capture 20-25% of the Asia Pacific's private debt market by 2028.
Risks Grow with Private Credit Reliance
While private credit offers flexibility, it brings structural risks. These loans typically carry higher interest rates, ranging from 12-21% Internal Rate of Return (IRR), compared to traditional bank loans. This increased borrowing cost directly impacts developer profit margins. In contrast to previous periods when strong sales meant construction loans were often underused, developers are now drawing down up to 80% of their available credit lines due to slower sales. This rising debt level raises questions about the sector's financial stability. Even firms like Sundaram Alternates, which target 13-16% IRRs, may face challenges as the sheer volume of debt grows. Adding to the pressure, the Reserve Bank of India's (RBI) stricter project finance rules, effective October 1, 2025, restrict access to additional loans. This forces developers to seek larger initial funding, further pushing them toward private capital. New project completions fell 36% quarter-on-quarter in Q1 2026, the lowest in a year, as developers adjusted construction schedules to match incoming payments.
Higher Costs Strain Developer Margins
This heavy reliance on private credit heightens financial risks for developers. The elevated cost of this financing directly eats into profit margins. Although underlying housing demand remains strong, fewer inquiries are converting into sales, leading to slower sales momentum. This creates cash flow problems at the project level and potential difficulties in meeting repayment obligations. Developers heavily dependent on private credit face greater distress if market conditions deteriorate, unlike competitors with less debt or better financing terms. Historical developer defaults and liquidity issues, often worsened by high debt and complex structures, serve as stark warnings. The RBI's recent project financing rules also mandate higher provisioning for real estate exposures (1% for commercial, 0.75% for residential), potentially increasing capital costs further. This growing use of pricier debt points to a structural weakness, making the sector more vulnerable to future slowdowns.
Market Growth and Potential Defaults
The Indian private debt market for real estate is forecast to reach $2-3 billion annually. This growth is significant given the Asia Pacific region's projected $90-110 billion private debt market by 2028, where India could capture 20-25%. Major lenders like Motilal Oswal Alternates and Sundaram Alternates manage substantial real estate funds, with Assets Under Management (AUMs) in the billions. Knight Frank data shows India's private credit AUM surged from $0.7 billion in 2010 to $17.8 billion in 2023. However, with sales continuing to soften, the likelihood of higher default rates among developers struggling with costly debt is increasing. The sector's future depends on developers' ability to manage rising debt levels amid slower sales and potentially tighter credit in the future.