BMI View : Saudi Arabia ' s non-oil economy and robust underlying growth will support investment into the commercial real estate market over the longer term. Growing numbers of foreign players are also expected to enter the market during this period, on the back of governmental incentives and reduced restrictions which will see strong demand for office and retail space. Although, rental stagnation is expected over the remainder of 2015, with potential marginal rises by 2016.
Oil is the key driver of the Saudi economy contributing just under half of the country's GDP, over 90% of exports and around three quarters of the Government's capital reserves. In an effort to reform economic reliance, the Government is seeking to diversify the economy, particular towards manufacturing and services. This has seen Saudi Arabia making great strides to open up their economy to foreign investors. Following accession to the World Trade Organization (WTO), new laws and initiatives on competition, capital markets, corporate taxation, insurance and foreign ownership of lands began to create a more level playing field. This can be witnessed by the introduction of favorable business policy, such as the allowing of 100% ownership in wholesale and retail outlets, which have alleviated pressure on foreign profitability in the market. We believe that the government's determination to keep fiscal policy on an expansionary footing along with pent up levels of public investments, will provide suitable fundamentals to support the expansion of the non-oil economy. We therefore forecast real GDP growth of 3.7% this year (using 1999 as a base year) and 3.2% in 2016, compared to 4.0% in 2013.
Riyadh is the capital and largest city of Saudi Arabia, with a regional population of an estimated 7mn. It is a focal point for both travel and trade. King Fahad Road has been a primary objective for businesses in the city, with a variety of commercial properties residing here. King Abdullah Street however, is also increasing in importance and should appeal to emerging market players. Large regional and super regional shopping malls here comprise the majority of consumer interest, and due to the fact that a good proportion of entertainment facilities are band in the country, we see this continuing to be a major contribution to the economy here.
Jeddah on the other hand retains an extensive port, which has aided the city in securing its place as a commercial hub. Prime corporate office space and retail real estate are in demand with the most prominent activity witnessed on King Abdullah Street and Tahlia street, which contains many exclusive boutiques and stores of recognised international brands including Chanel, Burberry and Gucci. Retail sales therefore comprise a large component of the economic revenues here and we expect this trend to continue as demand rises for contemporary western units.
Among the key trends we note is the growth in the broader financial industry and related services industry, stemming from greater investments into the private sector. This will help support demand for office space in prime city locations of Riyadh and Jeddah. Significant office developments, such as the ITCC and KAFD, have received continued delays over previous years, but we expect to see these issues subside and allow substantial supply to enter the market by 2016 and 2017.
Regarding the retail sector, a strong consumer spending base and growing numbers of tourism, predominantly religiously motivated, has seen a thriving shopping mall culture, with a growing number of investors looking to acquire premium grade space in these establishments as a result. Furthermore, firm competition for quality space has seen companies raise demand for high street units, and as strong growth in income levels and rising consumer demand are prevalent market factors, we expect robust retail real estate growth in the medium-term, whilst little development activity in the short-term should see vacancies in malls gradually decrease; possibly influencing marginal rental rise in these constituencies.
The industrial real estate segment is likely to prove the least dynamic of the three markets over the short term as it feels the effects of weakness in the hydrocarbons sector. However, rising demand for retail superstores could see pent up demand for suitable warehousing space, and with the introduction of the 'industrial cities' programme, the sector will witness new industries enter the market; such as petrochemicals and pharmaceuticals. As a result, the industry could witness potential upward pressure to rentals in the long-term.
Saudi Arabia's property market begins to command more attention from foreign investors, as a growing business friendly environment allows greater numbers of these firms to retain full ownership of their in-country corporates. Moreover, the wealth of the nation is able to withstand the current woes from oil prices falling, and we expect this to contribute to strong investor confidence in the coming forecast period.