In the European Union the final phase of Basel III has been law since 1 January 2025, and Switzerland's revised Capital Adequacy Ordinance took effect on the same date. The United Kingdom has confirmed its own start for 1 January 2027, and on 19 March 2026 United States regulators issued a fresh proposal to complete their version after years of delay. A framework bankers argued over for a decade now sets the price of a bank loan secured against property, which matters to a developer trying to fund a project and to an investor weighing where secured lending is heading over the next cycle. Here is what changed, what it does to property lending, and where the demand it displaces is going.
What the new rules actually are
Basel III began as the global response to the 2008 financial crisis. The first waves dealt with how much capital a bank holds and how easily it can fund itself. This last package, finalised by the Basel Committee between 2017 and 2019 and often called the Basel III endgame or Basel IV, deals with a narrower question: how a bank measures the risk of what it lends against. Three changes carry most of the weight for property lending.
The first is the output floor. Large banks used to build internal models that produced their own estimate of how risky a loan was, and those models often justified holding very little capital against it. The output floor sets a hard limit on that. A bank's modelled risk-weighted assets cannot fall below 72.5% of what the standardised approach would produce. The floor phases in across the decade, starting at 55% in 2026 and stepping up to 72.5% by 2030. The effect is blunt and deliberate: the capital saving a bank used to get from a finely tuned internal model mostly disappears.
The second is a more risk-sensitive standardised approach to credit risk, with real estate carved up far more finely than before. The rules now distinguish residential from commercial, owner-occupied from rental, and, most importantly for developers, they single out lending where repayment depends on the cash flow the property itself produces. In the EU framework this is the income-producing real estate category, and it carries higher risk weights than a standard mortgage. There is also a separate, granular treatment for specialised lending such as project finance, where a project still under construction draws a heavier charge than one already operating and generating income.
The third is a tighter rule on how property value can be counted. Under the EU's CRR3, a bank can no longer mark a property up to a frothy short-term market price when it sets the loan-to-value ratio. Valuations are capped at a multi-year average, six years for residential and eight for commercial, so a price spike can't quietly lower the capital a bank holds against a loan. Switzerland implemented the same core standards through the revised Capital Adequacy Ordinance and the supervisor's implementing ordinances, alongside updated Swiss Bankers Association guidelines on mortgage lending. The Swiss design aims for capital neutrality on average across the sector, but the more granular treatment of mortgages still steers capital along the lines described above: residential against commercial, owner-occupied against rental.
What this does to property lending
Taken together, the three changes make the loans a mid-market developer needs the ones a bank finds most expensive to hold, and construction and development lending sits at the sharp end. A half-built scheme produces no income, depends on a future sale or refinancing, and now attracts a heavier capital charge under the specialised-lending and income-producing categories. The output floor removes the modelling tricks that used to soften that charge.
Bryan Cave Leighton Paisner's October 2025 commentary put the competitive shift directly: banks long reliant on internal models tuned to stable commercial property markets, particularly in Germany and the Nordics, lose much of the capital advantage those models gave them, and a lending pullback has begun in real-estate finance where the new capital cost can exceed the economic benefit.
Banks keep lending against property; what changes is the mix. Faced with a higher capital cost on a given loan, a bank's instinct is to keep the simplest, most liquid, lowest-risk exposures and step back from the rest. Analysis of the mid-market specifically has tracked individual bank hold sizes shrinking and arrangers either assembling larger club groups or handing the mandate to direct lenders who face no comparable capital constraint. The slow, fact-heavy, structurally complex deal is the first to get repriced or declined, and that describes a large share of real development work.
Price is only half of it; time is the other half. Heavier capital rules sit on top of compliance processes that have lengthened every year, and financing that exists in principle but takes months to approve, on terms that can still move late in the process, does little for a borrower whose purchase has a deadline or whose build has a schedule.
Why this makes private credit more relevant
Each retreat by a regulated bank opens ground for capital that carries no equivalent charge. That has been the structural story of private credit for a decade, and the final Basel rules extend it. The current commentary makes the point repeatedly: the rise of non-bank finance is both a cause and an effect of Basel, and the displacement of bank capital from mid-market lending is widely described as the largest single driver of private credit's growth.
A non-bank lender meets the same property deal from a different starting point. It holds no regulatory capital against a risk-weighted-assets formula, so a complex, sub-scale or development-stage loan that has become awkward for a bank's balance sheet can still be sound business for a private lender that assesses it properly. As banks have stepped back, private lenders have tended to negotiate stronger protections, lower leverage against the asset and tighter covenants, priced to reflect the work involved.
That last detail carries the argument. What Basel hands private credit is the diligence a bank no longer finds worth its capital, together with the obligation to hold real security against the loan, and the providers who take that business on structure are the ones best placed to grow into the gap.
Where Watson AM fits
The deals Basel makes expensive for banks sit at the centre of what Watson AM does. We arrange secured financing against European real estate, funded by private investors and capital partners whose capital carries no bank-style risk-weight charge, and the mid-market band the rules squeeze is the band we work in.
Security is set deal by deal. A facility can be secured by a first-rank mortgage registered as a condition of the investors' funding, a personal guarantee, a bank guarantee, or a combination the deal calls for, and every file runs through our nine-step due diligence on the borrower, the structure and the security package before it is presented to investors. The instinct is the one the new rules are trying to enforce across the banking system, applied file by file instead of through a capital formula.
Timing matters as much. Many of the borrowers who reach us have been left waiting by a bank: of our twelve published case files, a Geneva developer had searched for almost two years and a UK developer for more than 18 months before their term sheets arrived within 1.5 months and within a week of first contact. While banks grow slower and more selective, a clear path to funding is worth as much to a developer as the rate.
The rules also push banks towards the narrowest, most standard exposures, which leaves the considered, structurally complex deal underserved: a hospitality asset with seasonal cash flow, a cross-border structure, an adaptive-reuse or development scheme that has to be read rather than scored. Those are the files our diligence framework is built to take on.
The banks are doing what the regulation intends, holding more capital against riskier lending and concentrating on what is cheapest for them to carry. The projects they step back from still need capital, and for professional and qualified investors, secured private lending is increasingly where that need is met, with the security structured into each deal from the start.
Watson AM works with professional and qualified investors, and with developers and operators across eleven European markets. Investor and borrower material is available on request.
Common questions
What is the Basel III endgame, or Basel IV?
It's the final phase of the Basel III bank-capital reforms, finalised by the Basel Committee between 2017 and 2019. In the European Union it has applied since 1 January 2025 under CRR3, Switzerland adopted the same standards on that date, the United Kingdom starts on 1 January 2027, and United States regulators issued a fresh proposal on 19 March 2026. It changes how a bank measures the risk of what it lends against.
How do the new Basel III rules affect property lending?
They make the loans a mid-market developer needs more expensive for a bank to hold. The output floor removes most of the capital saving banks used to get from internal models, a more granular standardised approach raises risk weights on income-producing and development lending, and property values are capped at a multi-year average. Construction and development finance is hit hardest.
What is the output floor?
The output floor is a hard limit that stops a bank's modelled risk-weighted assets from falling below 72.5% of what the standardised approach would produce. It phases in across the decade, starting at 55% in 2026 and stepping up to 72.5% by 2030, which removes most of the capital advantage a finely tuned internal model used to give.
Why does Basel III make private credit more relevant for real estate?
A non-bank lender doesn't hold regulatory capital against a risk-weighted assets formula, so a complex or development-stage loan that has become expensive for a bank's balance sheet can be sound business for a private lender that underwrites it properly. The displacement of bank capital from mid-market lending has been the single largest tailwind behind private credit's growth.
Watson AM, Basel. This article is general market commentary for professional and qualified investors and for real-estate developers. It isn't investment, legal, or tax advice, or an offer of any financial product.
Sources
- Basel Committee on Banking Supervision, final Basel III standards (2017 to 2019), via the Bank for International Settlements.
- European Union, Regulation (EU) 2024/1623 (CRR3) and Directive (EU) 2024/1619 (CRD VI), in force from 1 January 2025. Overview: financialregulations.eu, CRR III and CRD VI Guide 2026.
- European Parliament, The implementation of Basel III: progress, divergence and the EU's choices (2025), on CRR3 real-estate valuation and IPRE treatment.
- Finalyse, Deep Dive into CRR3: Real Estate in the revised Standardised Approach, on loan-splitting and residential and commercial risk weights.
- Moody's, Basel IV and the Butterfly Effect (January 2026), on the increased risk weighting of mortgages under CRR3 and the impact on Nordic, Dutch, and German lenders.
- FINMA, FINMA publishes ordinances to implement the final Basel III standards (27 March 2024), and the Swiss Federal Council media release on the revised Capital Adequacy Ordinance, in force 1 January 2025.
- EY Switzerland, The Basel III Finalization has been approved by the Federal Council, on Swiss credit-risk changes and capital neutrality.
- Swiss Bankers Association, Prudential regulation, on the revised self-regulation for mortgage lending.
- Bank of England / PRA, Policy Statement PS1/26, Implementation of Basel 3.1: Final rules (20 January 2026), confirming a 1 January 2027 UK start date and IPRE treatment.
- Freshfields, Basel III Endgame, Take Two (March 2026), and Mayer Brown, US Banking Regulators Propose Reforms to Capital Requirements (March 2026), on the 19 March 2026 US re-proposal and the 18 June 2026 comment deadline.
- Bryan Cave Leighton Paisner, Basel Endgame: Divergence, competition and the next strategic moves (October 2025), on bank retreat from real-estate finance and the opening for non-bank lenders.
- ABF Journal, Basel III Endgame Delays Prolong Uncertainty for Middle Market Lenders (March 2026), on shrinking bank hold sizes and displacement towards direct lenders.
- Emerald Peak Capital, The Basel Effect: Reshaping Mid-Market Real Estate Financing (2025), on funding gaps in mid-market real estate.
- Sterling Asset Group, Basel III Endgame and Private Credit: CRE Debt Outlook, and Invesco, Why private real estate lending is growing, on private lenders filling the bank gap with stronger covenants.