Saudi Real Estate Refinance Company: Creating the Secondary Mortgage Market
The Saudi Real Estate Refinance Company (SRC) represents one of the most strategically important yet least visible components of Saudi Arabia’s housing finance infrastructure. Established by the Public Investment Fund (PIF) in 2017 and licensed by SAMA, SRC’s mandate is to develop and deepen the Kingdom’s housing finance market by creating a functioning secondary market for mortgage assets — enabling banks to originate mortgages, sell them to SRC, and use the proceeds to originate more mortgages, rather than holding loans on their balance sheets until maturity.
This secondary market function is critical for sustaining the mortgage market’s growth from approximately SAR 200 billion in 2018 to SAR 951.3 billion (USD 253.46 billion) by end of 2025 and onward to the SAR 1.3 trillion target by 2030. Without a functioning secondary market, bank balance sheet capacity would eventually constrain mortgage origination volumes, regardless of demand from Sakani-eligible families or the availability of subsidised housing from NHC and ROSHN. Real estate lending already accounts for nearly 30 percent of total bank credit — a concentration level that creates systemic risk concerns and limits banks’ appetite for additional mortgage exposure.
SRC’s solution is structural: by purchasing mortgage portfolios from banks, SRC frees balance sheet capacity for new origination. By securitising those portfolios into tradable instruments (RMBS and sukuk), SRC distributes the credit risk across a broader investor base — domestic institutional investors, international fixed-income portfolios, and sovereign wealth allocators. The result is a more resilient, more liquid, and more scalable housing finance system than one dependent solely on bank balance sheet capacity.
The First RMBS Transaction: Establishing the Precedent
Saudi Arabia’s first residential mortgage-backed securities (RMBS) transaction, completed between August and October 2025 following SAMA’s no-objection approval on August 21, 2025, marked a milestone for the Kingdom’s capital markets. The transaction required years of preparatory work: legal framework development (establishing the regulatory basis for securitisation), structuring expertise (designing tranches that meet investor requirements while maintaining pool quality), credit rating methodology (enabling rating agencies to assess Saudi RMBS risk), and investor education (familiarising institutional investors with a new asset class in the Saudi market).
HSBC Saudi Arabia served as arranger, bringing international structuring expertise to the inaugural transaction. A&O Shearman advised HSBC on legal aspects, while White & Case advised SRC — the involvement of two major international law firms reflecting the transaction’s complexity and precedent-setting importance. The legal documentation established by this transaction creates templates for future issuance, reducing transaction costs and structuring timelines for subsequent RMBS programmes.
The structure included senior, mezzanine, and junior tranches — the standard securitisation hierarchy that distributes risk according to investor appetite. Senior tranches, carrying the highest credit quality and lowest yield, appeal to risk-averse institutional investors such as pension funds and insurance companies. Mezzanine tranches offer higher yields with moderate risk exposure, attracting asset managers and credit funds. Junior tranches absorb first losses from the underlying mortgage pool, carrying the highest yield and highest risk — typically retained by the originator or purchased by specialised credit investors.
The inclusion of sukuk compatibility is a distinctive feature of Saudi RMBS. By structuring tranches that comply with Islamic finance principles — specifically, the requirement that returns derive from tangible asset performance rather than interest charges — SRC expanded the investor universe to include Islamic institutional investors who cannot hold conventional fixed-income securities. Given that Saudi Arabia’s banking system operates predominantly on Islamic finance principles, sukuk-compatible RMBS ensures that the secondary market instruments align with the primary market’s financing structures.
S&P Global Ratings assessed the RMBS market as a large opportunity anchored by the USD 180 billion home loan base and a well-capitalised banking sector. This assessment validates the structural soundness of Saudi RMBS — the combination of a large, growing mortgage portfolio, strong bank capital positions, conservative LTV and DTI regulations, and government-backed housing programme support creates a credit environment that supports robust securitisation. The inaugural transaction established the investor precedents necessary for a regular issuance programme, positioning SRC to scale RMBS issuance as the mortgage portfolio grows toward the SAR 1.3 trillion target.
Sukuk Programmes: Dual-Channel Funding Architecture
SRC has built a multi-channel funding platform through both local and international sukuk programmes, creating diversified access to capital markets that reduces funding risk and optimises cost.
Local sukuk programme: SAR 20 billion. The SAR 20 billion guaranteed local sukuk programme has been completed, with the final issuance comprising SAR 3.5 billion in dual tranches with five and seven-year durations. This programme provides SAR-denominated funding matched to the domestic mortgage portfolio — eliminating currency mismatch risk and aligning SRC’s liability profile with the predominantly SAR-denominated assets it purchases from banks.
The guaranteed nature of the local sukuk programme reflects PIF’s backing, providing sovereign-adjacent credit quality that enables cost-effective funding. Domestic institutional investors — Saudi banks, insurance companies, pension funds (including the General Organization for Social Insurance), and asset managers — have been the primary subscribers, creating a domestic investor base for Saudi mortgage-backed instruments.
The completion of the SAR 20 billion programme does not mean local sukuk issuance has ceased — SRC can establish successor programmes as market conditions and funding needs warrant. The demonstrated market capacity to absorb SAR 20 billion in SRC sukuk establishes a benchmark for future issuance volumes and provides pricing reference points for new programmes.
International sukuk programme: USD 5 billion. The international programme, listed on the London Stock Exchange, extends SRC’s funding reach to global capital markets. The first issuance of USD 2 billion, completed in February 2025, was oversubscribed six times by over 300 institutional investors across two tranches with three and ten-year maturities. The six-times oversubscription demonstrates substantial international appetite for Saudi mortgage-backed sukuk — demand that significantly exceeds the supply of instruments, suggesting capacity for larger future issuances.
The international programme serves several strategic functions beyond funding. It introduces foreign capital to the Saudi housing market, diversifying the funding base beyond domestic sources. It establishes Saudi sovereign-adjacent mortgage credit as an investable asset class for global fixed-income portfolios — a category creation that benefits future issuance by SRC, by Saudi banks seeking to securitise their own mortgage portfolios, and by the Kingdom’s broader capital markets development. And it demonstrates Saudi Arabia’s capacity to execute institutional-grade securitisation transactions that meet international investor due diligence, documentation, and governance standards.
The USD denomination of the international programme introduces currency considerations. SRC’s assets are SAR-denominated mortgages, while the international sukuk obligations are USD-denominated. The SAR-USD peg at 3.75 riyals per dollar mitigates exchange rate risk — as long as the peg holds, currency mismatch is negligible. However, the peg itself introduces macroeconomic dependencies: maintaining the fixed exchange rate requires SAMA to follow Federal Reserve rate decisions, which means SRC’s underlying mortgage portfolio is affected by US monetary policy through its impact on SAMA’s repo rate and consequently on mortgage origination volumes and pricing.
Refinancing Partnerships: Scaling the Secondary Market
SRC’s refinancing deals have exceeded SAR 12 billion, with an 85 percent growth rate, indicating rapid scaling of secondary market activity. The growth rate suggests that SRC is in an expansion phase where each quarter’s refinancing volume significantly exceeds the prior period — a trajectory consistent with an institution building market presence and bank relationship depth.
Al Rajhi Bank partnership: SAR 10.8 billion. The most significant partnership is with Al Rajhi Bank, Saudi Arabia’s largest Islamic bank and one of the largest mortgage originators in the Kingdom. Total agreements have reached SAR 10.8 billion for purchase of real estate financing portfolios. This partnership demonstrates the secondary market’s capacity to operate at institutional scale — SAR 10.8 billion represents a meaningful share of Al Rajhi’s mortgage book and provides substantial balance sheet relief for continued origination. The partnership validates the SRC model from the lender’s perspective: banks are willing to sell mortgage portfolios to SRC, indicating that the pricing, documentation, and operational processes work effectively for both parties.
REDF partnership: SAR 10 billion. A separate refinancing partnership with the Real Estate Development Fund covers a real estate portfolio worth SAR 10 billion. This government-to-government-entity partnership has distinct characteristics from commercial bank refinancing: REDF’s mortgage portfolio consists of subsidised loans to Sakani beneficiaries with government profit coverage, creating a different risk profile than commercial bank originations. The REDF partnership enables the Fund to recycle capital — using proceeds from portfolio sales to SRC to fund new subsidised loan commitments, sustaining the Sakani programme’s lending capacity without additional fiscal appropriations.
The combined SAR 20.8 billion in identified partnership commitments (Al Rajhi plus REDF) already approaches 28 percent of SRC’s five-year SAR 75 billion refinancing target, providing a foundation of committed volume on which to build additional partnerships with other banks and financing institutions. Saudi Arabia’s banking sector includes multiple other significant mortgage originators — Saudi National Bank, Riyad Bank, Banque Saudi Fransi, Alinma Bank, and others — each representing potential SRC refinancing partners that could contribute additional volume toward the target.
The Five-Year Target: SAR 75 Billion in Context
SRC’s five-year target of SAR 75 billion (USD 20 billion) in mortgage refinancing represents approximately 8 percent of the current SAR 951 billion mortgage market. While 8 percent may appear modest as a share of the total market, its significance lies in the marginal impact on bank lending capacity. If SRC refinances SAR 75 billion over five years (SAR 15 billion annually), it frees equivalent balance sheet capacity for new origination. Given that new residential mortgage originations totalled SAR 80.42 billion in 2025, SRC’s annual refinancing target of SAR 15 billion represents approximately 19 percent of the annual flow — a substantial contribution to maintaining bank lending velocity.
The target’s achievability depends on several factors. Bank willingness to sell mortgage portfolios at SRC’s offered prices is the primary commercial consideration — if banks can earn more by holding mortgages to maturity than by selling to SRC, refinancing volumes will be constrained. Investor appetite for SRC’s securitised instruments (RMBS and sukuk) determines SRC’s capacity to fund portfolio purchases — without reliable investor demand for the securities that SRC issues, the funding chain breaks. And the growth of the underlying mortgage market determines whether SRC’s target remains proportionally relevant — if the market grows to SAR 1.3 trillion by 2030 as targeted, SAR 75 billion in refinancing would represent only 6 percent of the total, suggesting that the target may need upward revision.
Credit Ratings and Institutional Credibility
SRC’s credit ratings provide the institutional credibility that supports cost-effective funding and investor confidence. Fitch rates SRC at A+ with a Stable outlook, S&P at A with a Positive outlook, and Moody’s at A2 with a Positive outlook. These ratings — positioned in the upper-medium investment grade category with potential for further upgrades — reflect SRC’s PIF ownership, SAMA licensing, the quality of Saudi Arabia’s mortgage portfolio (supported by conservative LTV and DTI regulations), and the strategic importance of SRC’s mandate within the housing programme.
The Positive outlooks from S&P and Moody’s suggest that rating agencies see potential for improvement in SRC’s credit profile — potentially through increased diversification of its funding sources, growth in its refinancing portfolio, demonstration of RMBS programme viability, or improvements in the broader Saudi sovereign credit picture. Rating upgrades would reduce SRC’s funding costs, enabling more competitive pricing for its refinancing products and securities — a virtuous cycle that supports the secondary market’s growth.
Capital Market Development Beyond Housing Finance
SRC’s secondary market development has implications that extend well beyond housing finance. By creating liquid, rated mortgage-backed instruments, SRC is deepening Saudi Arabia’s capital markets, providing new asset classes for domestic institutional investors (pension funds, insurance companies, asset managers), and supporting the Kingdom’s broader financial sector development objectives under Vision 2030.
The creation of RMBS as a domestic asset class addresses a structural gap in Saudi capital markets. Prior to SRC’s securitisation programme, Saudi institutional investors seeking fixed-income exposure were limited primarily to government sukuk, corporate bonds, and bank deposits. RMBS introduces a new risk-return profile — backed by tangible real estate collateral, supported by conservative regulatory standards, and offering yields that reflect credit quality rather than speculative risk. For pension funds and insurance companies with long-duration liabilities, mortgage-backed instruments provide duration-matched assets that improve portfolio construction.
The interaction with SAMA’s rate policy adds complexity to SRC’s investment proposition. As rates decline, existing fixed-rate mortgages become more valuable — their contracted yields exceed current market rates, enhancing the attractiveness of RMBS tranches backed by these seasoned portfolios. This dynamic supports SRC’s ability to securitise higher-rate vintage mortgages at favourable valuations. Conversely, prepayment risk increases as borrowers may seek to refinance at lower rates, potentially reducing expected cash flows from mortgage pools and requiring more sophisticated modelling of prepayment assumptions in RMBS pricing.
The foreign ownership law reforms create additional demand channels for SRC’s instruments. As international investors gain access to Saudi property assets under the zone-based framework, they may also become purchasers of Saudi RMBS and mortgage-backed sukuk — extending the investor base beyond the current domestic-plus-international-sukuk audience to include foreign institutional investors specifically interested in Saudi real estate credit exposure without direct property ownership responsibilities.
For related analysis, see our Mortgage Market Dashboard, SAMA Interest Rate Policy, LTV and DTI Regulations, Mortgage Market Outlook 2026, Sakani Program, and Homeownership.