Mustafi joined the Gunners in a £35 million move from Valencia in the summer transfer window and has immediately settled into the side alongside captain Laurent Koscielny.
The German international has impressed already and Neville, who worked with him as Valencia manager earlier this year, thinks he has the potential to develop even further at Arsenal.
“Mustafi has got an incredible amount of natural ability and talent, good physical capability and I think with age and maturity he will grow into being a fantastic defender,” he told Metro.
“He’s got all the attributes you would want. I think that ultimately it will help him playing along Koscielny who has got experience there playing at Arsenal. I think he’s got all the makings of it.
“Defenders will mature with age and I think he will get better and better.”
Mustafi is Arsenal’s second-most expensive purchase of all time behind only Mesut Ozil, but he has already gone some way towards justifying his considerable fee.
The 24-year-old has played every minute of the last eight Premier League games, helping the Gunners pick up six wins and two draws.
Arsenal are unbeaten since their opening day 4-3 loss to Liverpool at the Emirates and Mustafi’s partnership with Koscielny has been one of the stand-outs during that run.
Mustafi has won 58% of his tackles, 60% of his aerial duels and averages nine defensive actions per game so far this campaign, with his positional intelligence particularly noticeable.