The UK social housing sector faces potential deterioration in credit quality when the government imposes caps on social rents, Fitch Ratings says.

It comes after the government consultation into a potential rent cap.

The temporary cap could have a “more severe impact on the sector’s finances than the previous rent reductions, as the inflation differential will be higher” says Fitch Ratings.

Government analysis of a 5% cap estimates £1.5bn deficits for the sector in 2024-2025 to 2026-2027, widening to a deficit of £1.6bn in 2027-2028, with a total five-year impact of £7.4bn. This would “be exacerbated by a multi-year cap”.

The ratings agency says providers “face difficult decisions about limiting cost increases”, pointing towards increasing material costs and pressure from unions over staff pay.

Lower revenue and rising costs “will likely weaken the sector’s fundamental financial metrics, in particular EBITDA, leverage and debt-coverage ratios” the agency adds.

It says: “We expect providers to respond by reducing affordable development programmes unless commensurate government support is made available. Providers with a high proportion of social lettings revenue are likely to be those most affected, given the limited flexibility to increase other revenue streams.”