A market note from Watson AM, Basel
The final phase of Basel III is no longer a future event. In the European Union it has been law since 1 January 2025. In Switzerland the revised Capital Adequacy Ordinance took effect on the same date. The United Kingdom has now confirmed its own start date of 1 January 2027, and on 19 March 2026 United States regulators issued a fresh proposal to complete their version after years of delay. The framework that bankers spent a decade arguing about is here, and it changes the price of a bank loan secured against property. For a developer trying to fund a project, or an investor weighing where secured returns will come from over the next cycle, it's worth understanding in plain terms. Here is what changed, what it does to property lending, and why a firm like Watson AM sits where the demand is heading.
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 a set of FINMA 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 pushes capital toward exactly the differentiation described above: residential versus commercial, owner-occupied versus rental.
What this does to property lending
Put the three changes together and a pattern emerges. The loans that get more expensive for a bank to hold are precisely the ones a mid-market developer needs. 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.
A commentary from one European law firm 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 don't stop lending against property here. They re-sort. 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.
There's a second effect that matters just as much as price: speed. Heavier capital rules sit on top of compliance processes that have grown longer every year. For a borrower, financing that exists in theory but takes months to approve, on terms that can move late in the process, is not much use when a purchase has a deadline or a build has a schedule.
Why this makes private credit more relevant
Every retreat by a regulated bank opens ground for a lender that isn't carrying the same capital charge. That is the structural story of private credit over the past decade, and the final Basel rules extend it rather than end it. The point is made repeatedly across the current commentary: 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 has been the single largest tailwind behind private credit's growth.
A non-bank lender approaches the same property deal from a different starting point. It isn't holding 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 be a perfectly sound piece of business for a private lender that underwrites it properly. As banks have stepped back, private lenders have tended to negotiate stronger protections, lower leverage against the asset, and tighter covenants, while lending at a return that reflects the work.
That last point is the one worth sitting with. The opportunity Basel hands to private credit is an invitation to do the diligence a bank no longer finds worth its capital, and to hold real security against the loan. A lender that wins this business on structure rather than on price is exactly the lender that should be growing into the gap.
Where Watson AM fits
Watson AM was built for this shape of market. The firm lends against European real estate on a secured basis, funded by investor and lending-partner capital rather than a regulated bank balance sheet, which means the deals Basel is making expensive for banks are the firm's core territory rather than its margin. Three things line up with where demand is moving.
Security comes first. Every loan is structured around hard protection: first-rank mortgages registered before any money moves, personal guarantees where the deal supports them, and a full nine-step due diligence process that vets the borrower, the structure, and the security package before approval. This is the same instinct the new rules are trying to enforce across the banking system, applied deal by deal rather than through a capital formula.
Certainty and speed come second. The borrowers who reach Watson are often the ones a bank has left waiting. Several had spent eighteen months to two years looking for financing elsewhere before a term sheet arrived, in some cases within days of first contact. In a market where banks are getting slower and more selective, certainty of close becomes a product in its own right.
Range comes into it too. The rules push banks toward 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 project that needs reading rather than scoring. That is the work Watson's diligence framework is designed to take on.
The banks are doing what the regulation intends, holding more capital against riskier lending and concentrating on what's cheapest for them to carry. The capital those projects still need has to come from somewhere. For qualified and professional investors, secured private credit is increasingly where that need is met, and where the security can be built deliberately into every deal.
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 toward 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.