India's real estate industry serves as the second-largest employment generator in the country. It is a focal point of India's urban development that can help the nation fulfil its vision of emerging as a developed economy by 2047. The sector has progressed from a static asset class to a dynamic and agile financial ecosystem that responds rapidly to market forces and policy interventions. Market projections indicate sustained growth, with the sector expected to reach $26 trillion by 2047. However, this massive potential may face significant headwinds from traditional financing mechanisms that create capital deployment bottlenecks.
The Indian real estate sector is affected by traditional financing mechanisms including regulatory constraints (SARFAESI delays, single borrower limits, RERA compliance costs), structural mismatches between banking products and real estate's long gestation periods with continuous capital needs. Moreover, the industry also suffers from market access gaps where Tier-2/3 cities and affordable housing segments struggle to access traditional financing due to perceived risks and unfavourable cost-to-loan ratios. These may deter the sector's ability to meet the growing demand efficiently.
Financing constraints appear particularly pronounced when examining regional disparities. Capital largely remains concentrated in India's top 8 Tier 1 cities, with these markets capturing ₹3,60,000 crore through primary housing sales. This concentration reflects a market experiencing significant premiumisation, evidenced by rising average ticket sizes from ₹1.24 crore to ₹1.42 crore and the growing dominance of luxury segments. This is particularly apparent in the NCR region where 73% of the market comprises properties above ₹3 crore. Such an evolving landscape demands innovative capital flow mechanisms that support both affordable housing initiatives and premium developments across all city tiers.
Traditional Capital Flow Constraints
Banking institutions and Non-Banking Financial Companies (NBFCs) maintain risk-averse lending practices that create significant financing gaps, particularly affecting mid-market firms operating in emerging markets. Lengthy approval processes and complex documentation requirements cause further delays during critical project phases, which determine the success or failure of the project. Moreover, NBFCs' inherently higher capital costs mostly impact smaller realty players in Tier-2 and Tier-3 markets, where access to alternative financing sources remains limited.
Challenges inherent to the prevailing market structure present additional constraints that affect both supply and demand dynamics. Housing price inflation has reached significant levels with average ticket sizes increasing by 14% year-on-year across India (from ₹1.24 crore in H1 CY'24 to ₹1.42 crore in H1 CY'25), while the broader Indian real estate market witnessed a 9% value growth despite a 5% decline in unit sales, revealing fundamental financing-supply imbalances where demand outstrips supply capacity.
This highlights the disconnect between market demand and available financing solutions. Working capital shortfalls between land acquisition and construction phases continue to disrupt project viability, forcing realty firms to seek expensive bridge financing or delay project launches.
Sector-Specific Capital Strategies
The sector's diverse requirements call for specialised financing approaches tailored to meet the aforementioned challenges for specific market segments. Blended finance mechanisms that merge government subsidies with private capital have emerged as effective tools for addressing the nation’s 31.2 million housing unit demand by 2030. These hybrid structures leverage public resources to de-risk private investments while maintaining commercial viability.
Innovative investment vehicles such as Real Estate Investment Trusts (REITs) have provided much-needed exit mechanisms for realty firms, enabling capital recycling and improved liquidity management. Logistics financing has gained particular prominence in supporting e-commerce-driven warehousing demand which reflects the sector's adaptation to changing economic patterns. Public-Private Partnership (PPP) models have found renewed relevance in transit-oriented developments that monetise metro connectivity and urban infrastructure investments.
The Reserve Bank of India's decision to maintain the repo rate at 5.50% is anticipated to ensure borrowing cost stability, thereby bolstering recovery momentum and investment confidence within the real estate market. This strategic approach effectively manages inflation concerns while ensuring continued access to capital for both real estate firms and prospective homeowners.
Government-Led Financial Innovation
The government's proactive approach to addressing financing challenges has yielded impressive results through targeted policy interventions. The Pradhan Mantri Awas Yojana (PMAY), as a scalable housing finance solution, has sanctioned over 1.19 crore houses. This demonstrates both the scale of demand and the potential for systematic intervention. Similarly, the SWAMIH Investment Fund has raised approximately ₹25,000 crore to provide priority debt financing for stressed, brownfield, and RERA-registered affordable and mid-income housing projects, successfully delivering over 52,000 homes with plans to deliver 20,000 homes annually for the next three years. With 40,000 additional units expected to be completed in 2025, the fund addresses the financial burden on middle-class families paying both EMIs and rent, while the new SWAMIH Fund-2 targets an additional 1 lakh units through sanctioned projects across multiple cities, ensuring delayed housing developments reach completion.
International confidence in India's real estate sector has also grown substantially, with FDI inflows surging by 53% to reach $1.4 billion in the first half of 2025. This surge indicates growing recognition of India's real estate sector as an attractive investment destination capable of generating sustainable returns. Emerging mechanisms continue to evolve, with Alternative Investment Fund (AIF) regulations enabling more sophisticated institutional structures. Single-window clearance initiatives have successfully reduced capital lock-in periods, while expanded credit guarantee schemes have enhanced reach in previously underserved markets.
Future Capital Flow Framework
The sector's trajectory toward a $26 trillion market by 2047 will require fundamental changes in how capital flows are structured and managed. Projected job creation of 78 million positions by 2030 underscores the sector's continued role as an employment generator. Simultaneously, the rising institutional allocations signal growing recognition of real estate as a legitimate asset class for pension funds and insurance companies.
As policy support, technical innovation and market maturity converge to accelerate the country’s growth strategy, India finds itself at a pivotal crossroad. However, as the industry transitions from traditional models to digital and integrated financing solutions, meeting the nation’s housing and infrastructure needs will depend on collaborative innovation among government, financiers, realty players, and technology providers.
(Shekhar Patel is President of CREDAI.)
Views are personal and do not represent the stand of this publication.
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