Secure the Capital Stack Your Project Needs
A stricter credit environment
Real estate professionals across Switzerland are facing a marked shift in how banks approach project financing. Senior bank lending for new developments has slowed significantly. Domestic mortgage volumes grew by only 2.3% in 2023, below historical averages, while other loan categories contracted by around 1%. At the same time, 94% of new mortgages now sit in low-risk brackets of roughly 65% loan-to-value, a clear indication of the cautious stance taken by lenders.
The causes of this tightening
This tightening reflects a broader regulatory and capital environment. Rising capital requirements have pushed banks to demand larger equity contributions from developers and to decline projects that carry higher levels of risk. In some cases, banks even prefer holding deposits rather than financing development, leaving otherwise viable projects without sufficient senior credit.
Consequence: a financing gap
The consequence is a persistent funding gap. Developers with solid business plans and projects aligned with housing demand are finding that senior bank loans no longer cover the majority of costs. Instead of financing up to 70 or 75% of project values, banks are retreating to safer thresholds, creating pressure on equity and threatening the feasibility of projects.
The role of junior financing
This is where junior loans, particularly mezzanine financing, enter the picture. By filling the space between conservative bank lending and developers’ equity, mezzanine capital provides an effective solution to unlock stalled projects. Foxstone has already deployed about CHF 30 million in junior loans in the second quarter. These transactions demonstrate how complementary financing allows projects to move forward despite the restrictive stance of traditional banks.
Junior financing plays a strategic role in reducing the equity burden for developers. Instead of diluting ownership or bringing in expensive equity partners, developers can maintain control while still accessing the capital needed to complete their projects. Interest costs are higher than senior bank debt, but remain more attractive than raising new equity. For many developers, this balance of cost, flexibility, and control makes mezzanine debt a pragmatic tool in the current market.
A pragmatic market response
The Swiss market is adapting. On one side, banks remain cautious, adhering to low-risk thresholds and prioritising stability. On the other side, flexible junior financing is proving its capacity to bridge gaps in the capital stack. Together, these two forms of capital ensure that developers with viable projects can still secure full financing structures.
For businesses active in real estate development, this dual-track environment underscores the importance of planning capital stacks strategically. Maintaining strong banking relationships remains vital, but combining them with junior financing partners is becoming an essential part of keeping projects viable.
Outlook
The fundamentals of the Swiss property market remain intact. Population growth and structural housing demand continue to support new developments. The real challenge lies in navigating the more selective approach of banks. Developers who integrate junior financing into their capital strategies are better positioned to ensure projects move forward on schedule and without compromising ownership.
The direction is clear: as banks tighten, junior loans are no longer peripheral, but are central to how Swiss real estate development is being financed.
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