Saudi Arabia's First RMBS Transaction: A Capital Markets Milestone for Housing Finance

Saudi Arabia’s First RMBS: Opening the Capital Markets Channel for Housing Finance

The completion of Saudi Arabia’s first residential mortgage-backed securities (RMBS) transaction between August and October 2025 marked a structural milestone in the Kingdom’s capital markets infrastructure. This inaugural issuance by the Saudi Real Estate Refinance Company (SRC), following SAMA’s no-objection approval on August 21, 2025, established the legal, structural, and investor precedents necessary for a regular RMBS programme that will support the mortgage market’s continued growth toward the SAR 1.3 trillion 2030 target.

Transaction Structure and Participants

The transaction was arranged by HSBC Saudi Arabia, with A&O Shearman advising HSBC and White & Case advising SRC. The structure included senior, mezzanine, and junior tranches — the standard waterfall architecture that allocates cash flows and credit risk in order of priority. Senior tranche holders receive payment first and bear the least credit risk, while junior tranche holders absorb initial losses but receive higher yields. This priority-of-payment structure is the global standard for mortgage securitisation and its successful implementation in Saudi Arabia confirms the Kingdom’s legal and financial infrastructure can support complex structured products.

Crucially, the tranches incorporated sukuk compatibility, enabling both Islamic and conventional institutional investors to participate. This dual-track design was essential for the Saudi market, where Sharia-compliant investment mandates govern a significant portion of institutional capital. By structuring the RMBS to satisfy both conventional fixed-income and Islamic finance requirements, SRC maximised the potential investor base from the outset — a design decision that will facilitate larger future issuances.

The sukuk compatibility also addresses a structural challenge unique to Islamic finance markets. Traditional RMBS rely on interest-rate mechanics that conflict with Sharia principles prohibiting riba (interest). The Saudi RMBS structure uses murabaha or ijara-based underlying contracts — the same financing structures used in Saudi mortgage origination — enabling a consistent Sharia-compliant chain from loan origination through securitisation to investor payout.

The Mortgage Market That Underpins RMBS

S&P Global Ratings assessed the Saudi RMBS market as a large opportunity anchored by the USD 180 billion (approximately SAR 675 billion) home loan base and a well-capitalised banking sector. This assessment validates SRC’s strategic rationale. By end of 2025, total real estate loans outstanding reached SAR 951.3 billion (USD 253.46 billion), reflecting a 7.7 percent rise during the year. Real estate lending comprised nearly 30 percent of total bank credit by mid-2025 — a concentration level that creates systemic incentive for developing secondary market channels that redistribute risk away from bank balance sheets.

The mortgage market’s growth trajectory has been steep. From approximately SAR 200 billion in 2018, the market expanded to SAR 800 billion by 2024, driven by the Sakani programme’s subsidised lending and SAMA’s relaxation of loan-to-value ratios from 85 percent to 90 percent for first-time buyers (with down payments reduced further to 5 percent for REDF beneficiaries on properties valued at SAR 800,000 or less). The 2030 target of SAR 1.3 trillion implies an additional SAR 500 billion in mortgage growth — volume that the banking sector cannot absorb on balance sheet alone without the release valve that RMBS provides.

In 2025, 108,795 new residential mortgage contracts were signed valued at SAR 80.42 billion, an 11 percent decline from 2024’s SAR 91.1 billion. December 2025 origination of SAR 5.55 billion compared to SAR 11.94 billion in December 2024 — a decline exceeding 53.5 percent. November 2025 saw the year’s lowest monthly origination at SAR 4.47 billion. These declines make the RMBS channel more rather than less important: as origination volume fluctuates, RMBS provides banks with the ability to recycle capital by selling existing mortgage portfolios, maintaining lending capacity even when new origination dips temporarily.

SRC’s Multi-Channel Funding Architecture

The RMBS transaction complements SRC’s other funding channels, creating a diversified three-pillar funding architecture.

The first pillar is the SAR 20 billion guaranteed local sukuk programme, which SRC completed with a final issuance of SAR 3.5 billion in dual tranches at five and seven-year durations. This programme, backed by government guarantee, provides SRC with low-cost domestic funding in Saudi riyals, eliminating currency risk and tapping the deep pool of local institutional investors including pension funds, insurance companies, and bank treasury operations.

The second pillar is the USD 5 billion international sukuk programme listed on the London Stock Exchange. The first issuance of USD 2 billion, completed in February 2025, was oversubscribed six times by over 300 institutional investors in two tranches at three and ten-year maturities. This programme connects Saudi housing finance to global capital markets, attracting international fixed-income investors who bring dollar-denominated funding and diversify SRC’s investor base beyond domestic institutions.

The third pillar — the RMBS programme initiated with this inaugural transaction — differs fundamentally from the sukuk channels. While sukuk issuances are SRC corporate obligations backed by its credit rating (Fitch A+ Stable, S&P A Positive, Moody’s A2 Positive), RMBS securities are backed by specific pools of mortgage assets. This asset-backed structure allows SRC to issue securities whose credit quality derives from the underlying mortgages rather than SRC’s corporate balance sheet, enabling higher volumes of issuance without degrading SRC’s own credit metrics.

Together, these three pillars support SRC’s SAR 75 billion five-year refinancing target. SRC’s refinancing deals have already exceeded SAR 12 billion with an 85 percent growth rate, anchored by the SAR 10.8 billion in agreements with Al Rajhi Bank for purchase of real estate financing portfolios and the SAR 10 billion refinancing partnership with REDF.

Implications for Bank Balance Sheet Management

The RMBS channel addresses a growing structural tension in the Saudi banking system. With real estate loans approaching 30 percent of total bank credit, individual banks face concentration risk that regulators monitor carefully. SAMA’s prudential framework includes debt-to-income limits — 55 percent for standard borrowers and 65 percent for housing programme beneficiaries — and loan-to-value caps that constrain per-borrower risk. But aggregate portfolio concentration on bank balance sheets creates systemic exposure that individual borrower limits do not address.

RMBS resolves this tension by enabling banks to originate mortgages, sell them to SRC for securitisation, and receive cash that can be redeployed into new mortgage origination. The bank earns origination and servicing fees while transferring credit risk to RMBS investors. This originate-to-distribute model, standard in mature mortgage markets like the United States and Europe, allows mortgage volumes to grow beyond what bank balance sheets alone can support.

For the housing programme, this matters because the remaining growth path to 70 percent homeownership requires continued mortgage volume increases. The 107,000 housing finance contracts signed in 2024 and the 106,000 contracts signed through the Sakani platform in H1 2025 alone represent ongoing demand that must be funded. If bank balance sheet constraints were to bind — limiting new mortgage origination because existing portfolios consume available capital — the homeownership programme would stall regardless of demand or supply conditions.

Market Development Implications

The inaugural RMBS establishes several precedents that lower barriers for future issuances. Legal documentation, regulatory approvals, rating methodologies, and investor due diligence frameworks established in this first transaction become templates for subsequent deals. The cost and complexity of RMBS issuance typically decline after the inaugural transaction as market participants develop familiarity with the asset class.

The transaction also creates a benchmark for mortgage credit pricing in Saudi Arabia. RMBS tranche pricing reveals how the market values Saudi mortgage credit risk — information that did not previously exist in securitised form. This price discovery function benefits the entire mortgage ecosystem by providing a market-based reference point for mortgage origination pricing, refinancing terms, and risk assessment.

For international investors, the Saudi RMBS programme opens a new asset class. Global fixed-income investors seeking exposure to Saudi Arabia’s economic transformation have had limited options — primarily sovereign bonds and quasi-sovereign corporate issuances. RMBS adds a consumer credit instrument backed by the housing assets of Saudi families, diversifying the available Saudi investment universe and attracting investors with specific structured-credit mandates.

The Saudi real estate market is forecasted to grow from over USD 75 billion in 2025 to nearly USD 110 billion by 2030. RMBS development ensures the financial infrastructure grows in parallel with the physical real estate market, preventing a bottleneck where housing supply exists but financing capacity does not.

Risks and Constraints

The nascent RMBS market faces several constraints. Market liquidity — the ability to buy and sell RMBS in secondary trading — will develop gradually. Without active secondary trading, investors must hold RMBS to maturity, limiting appeal to investors who require liquidity. SAMA and the Saudi Exchange (Tadawul) will need to develop market-making frameworks to support secondary trading over time.

Credit performance transparency is another development priority. Mature RMBS markets rely on extensive historical data about mortgage default rates, prepayment speeds, and recovery rates. Saudi Arabia’s mortgage market is relatively young — the expansion from SAR 200 billion to SAR 951 billion occurred largely since 2018 — limiting the historical data available for credit modelling. SRC and rating agencies will need to build this performance history through regular reporting as the RMBS programme matures.

The rate environment also affects RMBS economics. SAMA’s six consecutive rate cuts from 5.50 percent to 4.25 percent between August 2024 and December 2025 improve borrower affordability but compress the spread between mortgage yields and funding costs. The SAR-USD peg means SAMA’s rate trajectory tracks the US Federal Reserve, limiting the central bank’s ability to calibrate rates specifically for domestic housing conditions. Rate stability since December 2025 provides a favourable environment for RMBS structuring, but future rate volatility could affect issuance economics.

Homeownership Programme Integration

The RMBS channel directly supports the Sakani programme’s operational model. In H1 2025, over 106,000 housing contracts were signed through the Sakani platform, and over 27,000 subsidised loans were signed for low-income beneficiaries — exceeding the mid-year target by 63 percent. Each subsidised loan creates a mortgage asset that banks hold on their balance sheets. As these assets accumulate, RMBS provides the mechanism for banks to convert them into tradeable securities, freeing capital for continued origination.

The Dhamanat guarantee programme, with SR 18 billion in capital and SAR 77 billion in guaranteed real estate loans since 2018, enhances the credit quality of mortgages that enter RMBS pools. Government-guaranteed mortgages carry lower default risk, improving the credit profile of senior RMBS tranches and enabling tighter pricing that reduces the overall cost of housing finance. As the guarantee programme expands alongside Sakani lending, the pool of RMBS-eligible high-quality mortgage assets grows correspondingly.

The homeownership rate reached 65.4 percent by end of 2024, with a 4.6 percentage-point gap remaining to the 70 percent 2030 target. Closing this gap requires sustained mortgage origination at or above current levels. The RMBS channel ensures that bank balance sheet constraints do not become the binding constraint on this origination — even if rate cuts slow and price pressures persist, banks can continue originating if they can distribute mortgage risk through securitisation.

NHC’s 134,000 new units launched in 2025, valued at SAR 100 billion, and the Chinese developer agreement for 100,000 homes in 2026 will generate corresponding mortgage demand that the RMBS infrastructure must support. The White Land Tax reform targeting 411 million square metres of vacant urban land could release additional development parcels, further expanding the mortgage origination pipeline that feeds RMBS issuance.

Assessment

Saudi Arabia’s first RMBS transaction represents critical infrastructure investment for the housing programme. Without a functioning secondary market, the mortgage market’s growth toward SAR 1.3 trillion by 2030 would eventually be constrained by bank balance sheet capacity — even with SAMA rate cuts and regulatory relaxation. The RMBS channel ensures that financial infrastructure can support the demand-side of the 70 percent homeownership target. Combined with the local and international sukuk programmes, SRC has built a funding architecture capable of sustaining mortgage market growth at the scale Vision 2030 requires.

For related analysis, see SRC and RMBS Development, Mortgage Market Dashboard, SAMA Interest Rate Policy, SRC Company Profile, SRC International Sukuk, Mortgage Market Outlook 2026, LTV and DTI Regulations, and Murabaha vs Ijara Comparison.