After the Central Bank increased the interest rates last week, many people and businesses are already feeling the effects of this interest rate and it seems like the effects can only be set to get worse. I came across an interesting article on Fin24 yesterday which was titled: Rate hikes denting BEE. Not many people had thought about how increasing interest rates would affect BEE deals in South Africa. After all, most BEE deals are financed by investors borrowing money to finance the deal. Since 2006, the prime lending rate has increased from 10.5% to its current levels of 15%.

Coupled with these rising rates, it means that the profits being made by the business involved in the BEE deal have to be large in order to finance the high repayments at 15%. But let us not forget that most businesses in general are not experiencing high returns due to a slowing economy. This may see many BEE deals being put on hold until interest rates come down or there is an upturn in the economy and I do not see either of these two scenarios happening any time soon.

It is not only the BEE transactions that are being affected by the rising interest rates, the real estate sector is also going through a bad patch due to the hikes. A report in the Business Day said that a lot of estate agents in South Africa could be out of work very soon. And this makes perfect sense. Estate agents rely on people buying houses. Now with the increased interest rates, the cost of a mortgage is going to be beyond most peoples ability. With the increased interest rates you will tend to find that most people now are opting to rent a house rather than go out and buy one and have the added cost of a mortgage which in most likelihood they may not be able to afford. Estate agents who deal mainly with the rental mark are set to be in a better position these days than those who solely rely on selling property.

The real estate sector is not only suffering from the increased interest rates but there is also negative sentiment placed upon the sector due to the current electricity shortages in South Africa together with a slowing economy and high crime. Not many people are currently ‘running’ to buy new properties in South Africa.

We are in for tough times in South Africa with regards to interest rates and in the words of Tito Mboweni, we have to tighten our belts!

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