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The Saudi Arabia Real Estate report examines the commercial office, retail, industrial and construction segments throughout the kingdom in the context of a bullish outlook for the economy, its buoyant construction sector and the fledgling weakness in the commercial real estate rental market.

With a focus on the two principal cities of Riyadh and Jeddah, the report covers the rental market performance in terms of rates and yields over the past 18 months and examines how best to maximise returns in the commercial real estate market, while minimising investment risk and exploring the impact of the government-fed construction boom on a market already characterised by oversupply. The key growth areas driven by increasing activity on the part of international investors and the potential of the domestic consumer market are also explored, with corporate growth strategies looking to the kingdom for expansionary opportunities.

Nevertheless, Saudi Arabia’s various real estate sectors are developing in different directions and at varying rates. The commercial market in general suffers from oversupply and is forecast to undergo limited growth in the short term; newly collected data from H112 does not contradict this long-held view in light of the dynamic supply pipeline. Of the three sub-sectors that we survey there are pockets of growth opportunity, particularly in the retail segment.

Newly collected data in July 2012 covering the first six months of the year have not been encouraging, with demand failing to keep pace with new supply. With no sign of a slowing in the construction pipeline, we anticipate the imbalance to continue to place downwards pressure on the majority of rental rates.

The death of Crown Prince Nayef bin Abdulaziz al Saud on June 16 is unlikely to have a major impact on Saudi Arabia's short-term political risk profile, and we expect the process of appointing his replacement to play out relatively smoothly. Nevertheless, Nayef's death points to the longer-term succession risks facing the country, and we do not rule out the possibility of a succession contest emerging in the years ahead.

The government's announcement that it will implement another expansionary budget in 2012  highlights the government's ongoing concerns about the need to shore up its key bases of support, given the persistent threat of public unrest. While we maintain that large-scale protests are unlikely to occur in Saudi Arabia, large youth unemployment coupled with a lack of political  liberties mean that tensions will continue to linger.