Smaller cities, regional developers face funding squeeze as realty sector eyes $1 trillion future

By A Representative 

India’s real estate sector will require nearly Rs 50 lakh crore in capital over the next decade to support its transformation into a $1 trillion industry by 2030, but smaller cities and regional developers continue to face severe financing constraints despite growing housing demand, according to a new report prepared by the real estate consultants Anarock, "India’s Real Estate Finance Transformation."

The report highlights that while institutional funding in Indian real estate has become more organised and diversified in recent years, access to capital remains heavily concentrated in major metropolitan markets and among a limited group of large developers.

Regulatory hurdles, restrictions on bank financing for land acquisition, and stricter lending norms have made it increasingly difficult for smaller developers to secure affordable credit. Developers are often forced to depend on non-banking financial companies (NBFCs), alternative investment funds (AIFs), and private lenders, which typically charge higher interest rates, increasing overall project costs.

Legal disputes, title issues, delayed approvals and refinancing difficulties have further worsened funding challenges, particularly for developers operating in tier-II and tier-III cities.

According to the report, institutional capital continues to flow primarily into the top five cities and established developers, leaving smaller firms largely excluded from mainstream lending channels even as demand for housing expands beyond metropolitan centres.

Umesh Gowda H A, chairman and founder of the Bengaluru-based Sanjeevini Group, said the Indian real estate sector is entering a long-term capital expansion cycle with increasing institutional participation.

“One of the most important trends is the growing diversification of funding sources. While banks continue to dominate real estate lending, alternative investment funds (AIFs), real estate investment trusts (REITs), non-banking financial companies (NBFCs) and private capital are increasingly filling critical gaps across land acquisition, construction finance and last-mile funding,” he said.

He added that the strong growth trajectory of housing finance reflects continued end-user demand in India’s residential market.

The report noted that AIFs have emerged as a major funding source for developers following the NBFC crisis of 2018. As of December 2025, real estate accounted for nearly 12 per cent of total AIF investments, amounting to around USD 8 billion, according to data cited from the Securities and Exchange Board of India (SEBI).

Ankur Jalan, chief executive officer of Golden Growth Fund (GGF), a Category-II real estate-focused Alternative Investment Fund, said the funding ecosystem for Indian real estate has undergone a structural transformation over the past few years.

“Today, AIFs are not only supporting land aggregation and acquisition phases, where traditional lenders like banks and NBFCs typically remain absent, but are also increasingly participating across post-approval, construction and last-mile funding stages,” he said.

According to Jalan, this trend has improved project execution and liquidity visibility while strengthening market confidence. He said institutional capital is expected to play a larger role as demand increasingly shifts towards organised and branded developers.

However, industry experts say smaller developers in emerging urban centres continue to struggle with access to formal finance.

Lalit Parihar, managing director of Dholera-based Aaiji Group, said smaller developers have traditionally relied on internal accruals and informal financing due to limited institutional interest outside major metropolitan areas.

“Addressing funding gaps in affordable and mid-income projects, especially in tier-II and tier-III cities, will be essential for achieving balanced real estate growth,” he said.

Parihar added that the gradual expansion of AIFs, housing finance institutions and private capital into emerging cities is helping improve liquidity access and project execution, but much more needs to be done to support end-user driven housing markets.

The report concludes that the future growth of Indian real estate will depend not merely on the volume of capital entering the sector, but on how widely that capital is distributed across regions and categories of developers.

“Whether Indian real estate becomes a trillion-dollar industry will depend less on how much capital enters it, and far more on how far that capital is willing to travel,” the report said.