GDP (gross domestic product) growth in 2011 was estimated by the Finance Ministry to be around 6.8 percent, the fastest rate since 2003 and well above the 5.1 percent forecast made in November.

However, the government also increased public expenditure during the year, to a record $214 billion, 39 percent more than originally planned, but made possible by the oil income windfall and made expedient by the pressures of the “Arab Spring” which has brought issues of social inequality sharply into focus across the region, according to a market view about Saudi Arabia prepared by the CBRE Bahrain research team.

Despite the high levels of public spending and substantial government employee wage rises, the Kingdom posted a budget surplus of $81.6 billion, and inflation actually fell during the year to 4.7 percent - down from 5.3 percent in 2010. 

Plans for the massive redevelopment program for central Makkah have been announced and include the compulsory acquisition and destruction of 7,000 properties during 2012.

Ultimately, the project will offer a fully integrated transport system to include trams and ring roads and to incorporate expansion of the Grand Mosque. 

As part of the surge in infrastructure spending, the government has also committed to spending $2.9 billion on 284 road projects in 2012, including laying over 4,000 kms of new roads and studies on a further 2,000 kms.
 
OFFICE MARKET
 
The "Local Class A” office market is increasingly being dominated by increasing levels of oversupply and moderate levels of demand, while there remains strong demand and a shortage of supply in the two ”International Class A” properties - Kingdom Tower and Faisaliah.

There is a marked separation in pricing and occupancy rates between these two groups, with Riyadh's two “iconic” office projects enjoying full occupancy with waiting lists and rental rates at over SR2,000/sqm/pa, while Local Class A rates typically hover at between SR1,200 and SR1,400/sqm/pa.

Riyadh's office market improved slightly in 2011 in terms of rental rates and occupancy levels due largely to strong macroeconomic circumstances in the Kingdom, which were sufficient to override the continued weak global economic dynamics and new supply entering the market in 2009 and 2010.

The largest single development of new Class A space is in King Abdullah Financial District where it was widely hoped that the GCC central Bank would be located. However, the sheer volume of space entering the market would seem to present a significant challenge for this sector.

The growth in the supply of prime space in Riyadh is taking place in the context of a depressed global economy in which international firms including banks are seeking to cut overheads including staff and accommodation costs. Only the most bullish firms, with the deepest pockets, are seeking expensive expansion space in the short term.
 
RETAIL SECTOR

Similar to much of the Middle East, spending time in shopping malls in Saudi Arabia has become a key pastime over the last decade, largely because they offer easy access and plentiful parking, a temperature controlled environment and family-oriented entertainment at relatively low cost.

Malls are becoming larger and offering more sophisticated entertainment options - to the extent that Dar Al-Arkan has recently announced the creation of a “snow village” in a south Riyadh mall located in a relatively low-income area.

New malls actually need to achieve one of two main objectives to succeed - either capture the family or female markets who view the mall as a leisure/ entertainment option or successfully achieve the one-stop shop approach of the “community mall”.

In the coming years it is very likely that we will see developers approach the market in one of these two ways.
 
RESIDENTIAL MARKET

As the supply and demand gap continues to widen in the Saudi housing sector, affordability, access to mortgage finance and the lack of suitable products remain the key barriers to home ownership amongst Saudi nationals.

Saudi Arabia has the largest real estate market in the GCC, but the least developed mortgage market, and this has resulted in a shortage of owner-occupied residential housing, particularly at the lower end of the income scale. 

Saudi Arabia's mortgage penetration rate is estimated at around 2 percent, while markets such as the UAE have rates at around 14 percent. 

Even this figure is well below mature Western markets such as (for example) the United Kingdom where the penetration rate is currently around 70 percent.

There has been virtually no compound development in the last decade whilst there has been a surge in demand during the same period, partly arising from general macroeconomic growth and expatriate executive employment opportunities.

However, this is not the case looking forward, while macroeconomic indicators remain favorable, there is a significant volume of new compound units due to enter the market in the next few years, sufficient to ease demand/supply pressures and rental rates.

Similar to Riyadh, most housing developments in Jeddah take place on a relatively small scale, with developers typically building projects comprising no more than 30 units. This is partly the result of the lack of available development finance and restrictions which mean that developers are not able to apply downpayments to cover construction costs.

Apartment development has long been relatively popular on the corniche, but these units have historically been favored by buyers from Riyadh who use the properties for second home summer residences.

With land prices in Jeddah being largely over-speculated similar to other major centers in the Kingdom, developers have found it hard to address the needs of the affordable housing sector and therefore developments for sale in Jeddah continue to be focused on the middle income sector with reasonable levels of success.

The level of pent-up demand for housing from any sector capable of servicing a mortgage is substantial given the extremely low levels of mortgage penetration in the market at present.

The strong economic performance of Saudi Arabia which is likely to carry on through 2012 as a result of ever increasing oil prices is likely to continue to stimulate expatriate employment particularly at senior executive level. 

Consequently, and similar to Riyadh, the demand for expatriate compound housing in Jeddah currently far exceeds demand especially for the better quality, well maintained properties.