The Saudi real estate market has entered a new phase of dealing with the rising cost of funds, after the US Federal Reserve raised interest rates by 25 basis points, the first increase since 2023, followed by the Saudi Central Bank «SAMA» with the same step, raising the repurchase agreement rate «repo» to 4.50%, and the reverse repurchase agreement rate "reverse repo" to 4.00%.
The Saudi Arabian Monetary Authority's (SAMA) move comes as part of its efforts to maintain monetary stability, given the Saudi riyal's peg to the US dollar at 3.75 riyals per dollar. This makes US interest rate movements a significant factor influencing Saudi monetary policy. While a 25-basis-point rate hike may appear limited on the surface, its impact on the real estate sector extends beyond direct borrowing costs. It affects mortgage financing for buyers, project financing costs, companies' cash flow, and their ability to launch new projects or accelerate development.
The impact of rising interest rates on mortgage financing
Financing is one of the most important channels through which interest rate effects are transmitted to the real estate market. Higher borrowing costs can be reflected in the prices of loans offered to individuals, especially for loans with variable rates or those that are repriced in response to changes in market indicators. Real estate financing data in the Kingdom shows that financing costs remain relatively high; the average mortgage rate linked to the Saudi Interbank Offered Rate (SAIBOR) for a three-month term reached approximately 5.761 TP3T in the second quarter of 2026, compared to 5.851 TP3T in the first quarter of the year, according to data based on figures from the Saudi Central Bank.
Data from one of the largest Saudi banks, updated in August 2026, showed that the annual percentage rate (APR) for fixed mortgage financing to purchase a first home worth one million riyals is 5.71% for 25 years, while it is 5.73% for a second home.
This means that any further increase in the cost of funds may affect the purchasing power of some beneficiaries, as a higher cost of financing could lead to an increase in the monthly obligation or a reduction in the value of financing that the customer can obtain based on their income and obligations.
Real estate demand faces a cost-of-financing test
A rise in interest rates does not necessarily mean a halt in demand for real estate, especially in a market where housing purchases are linked to long-term decisions, but the higher cost of financing could push some buyers to postpone the purchase decision or look for units with lower prices or different sizes to keep the level of installments within their financial capacity.
This factor is of particular importance as part of the housing demand continues to depend on bank financing, while data from the first quarter of 2026 indicates that new residential mortgage financing reached 15.75 billion riyals, a decrease of 431 TP3T on an annual basis, according to research data based on data from the Saudi Central Bank.
Conversely, financing remains a key element in supporting homeownership activity, as the Kingdom aims to raise the percentage of citizens owning homes to 701 TP3T by 2030. The Saudi Real Estate Refinance Company also indicates that the demand for real estate financing in the Kingdom is expected to rise from 280 billion riyals in 2017 to 500 billion riyals in 2026.
Real estate developers... the impact varies from company to company
For real estate development companies, the impact of raising interest rates is not transmitted in the same way to all companies, as the magnitude of the impact is related to the level of indebtedness, the ratio of variable-cost financing, the dates of loan repricing, financing periods, and the terms of contracts concluded with financing entities.
Companies that rely more heavily on bank financing or variable-rate debt instruments may incur higher financing costs, which raises financing expenses and puts pressure on profit margins, especially in projects with a development period of several years.
Conversely, companies with higher liquidity levels or reliance on long-term, fixed-cost financing may be less exposed to the direct impact of the decision, while companies with strong cash flows can manage a larger portion of their financing needs from their internal resources.
Hence, raising interest rates does not necessarily mean a uniform impact on Saudi real estate development companies, but rather the degree of exposure varies according to the financial structure of each company, the nature of its project portfolio, and the timing of cash flows.
The cost of financing adds a challenge to the development cycle.
The impact of interest rates extends to the entire real estate project cycle, from land acquisition and infrastructure development to construction and unit delivery. The higher the cost of financing used during these phases, the more critical it becomes to manage working capital and align spending with sales and cash flow.
The rising cost of funds may prompt some developers to reprioritize projects, focus on projects with more obvious demand, or increase reliance on off-plan sales to accelerate cash flow, depending on each company's business model and available financing terms.
Conversely, some financial institutions offer financing solutions for real estate projects and buyers, including fixed-rate programs. For example, one Saudi bank offers financing for off-plan units at an annual percentage rate (APR) starting from 4.93%, subject to product terms, with the possibility of extending the financing period to 30 years.
In June 2026, the Saudi Real Estate Refinance Company also reduced its fixed long-term mortgage rate by 26 basis points for terms between 20 and 30 years, in a move it said was aimed at supporting the stability of the mortgage finance market and boosting liquidity.
Is the appeal of real estate investment declining?
Higher interest rates increase the opportunity cost of investing in real estate, as the returns required from some other investments become more attractive when interest rates rise, which may affect investors' decisions, especially in sectors that rely heavily on financing.
However, the Saudi real estate market does not move according to interest rates alone, as other factors are involved, including housing demand, major projects, population growth, government policies, the development of the financing market, and the movement of real estate prices and rents.
CBRE’s review of the Saudi real estate market in the first quarter of 2026 indicates that major developers continue to push through large-scale projects, despite the shifts in the finance and real estate market, reflecting the varying ability of companies and projects to cope with financing conditions.
Developers face the equation of liquidity and demand
The rise in interest rates puts real estate development companies in front of a double equation: maintaining customers' ability to purchase units on the one hand, and controlling financing costs and liquidity on the other.
Raising unit prices to offset higher financing costs may impact sales capacity, while absorbing the full increase could squeeze company margins. Therefore, cash flow management, project launch timing, debt structure, and capital turnover become more critical factors in company performance during periods of high interest rates.
Conversely, long-term, fixed-cost financing, partnerships with banks and finance companies, and diversification of liquidity sources can reduce some companies' sensitivity to interest rate changes.
The real estate market is caught between higher costs and structural demand.
In conclusion, SAMA's raising of the interest rate to 4.50% represents a step that increases the cost of funds in the market, but its repercussions on the Saudi real estate sector will not be equal for all parties.
A bank-financed buyer faces potentially higher financing costs, and a variable-cost debt developer may face increased financing burdens, while companies with high liquidity or fixed-cost debt remain less exposed to the direct impact.
Therefore, the decisive factor during the next phase will not be the interest rate alone, but rather the market’s ability to adapt to the new financing costs, the extent to which residential and investment demand continues, and the ability of developers to manage liquidity, debts, and projects in a tighter monetary environment.
