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SINGAPORE (Reuters) – Warburg Pincus-backed e-Shang Redwood (ESR) is in advanced talks to buy struggling Sabana Shariah Compliant Industrial REIT, sources familiar with the process said, in a likely first consolidation step in Singapore’s $3.5 billion mid-cap industrial trusts sector.

ESR, an Asian logistics developer, has been conducting due diligence on Sabana REIT and is set to complete its talks in a few months, said the sources. They, however, said ESR has not yet agreed on terms of a deal.

Sabana’s units jumped 10 percent to their highest in nearly four months on Monday before the company asked for a trading halt. More than 6.5 million units were traded, seven times the 30-day average volume.

The company said its manager, Sabana Real Estate Investment Management Pte Ltd, will issue a statement in response to the story.

ESR announced in March a 5 percent stake in Sabana REIT, which has assets of about S$1 billion ($735 million) comprising warehouses, logistics and high-tech industrial properties.

Late last year it agreed to buy up to 10.65 percent of another industrial REIT, Cambridge Industrial Trust, later renamed ESR-REIT. In January, ESR also bought an 80 percent indirect stake in the manager of that trust.

ESR’s stake purchases in Singapore REITs come as smaller industrial trusts bear the brunt of falling rentals and higher vacancies, with troubled offshore marine services firms and manufacturing companies cutting operations in a lackluster economy.

“These are strategic investments by ESR. The next step is a consolidation of subscale REITS,” said one of the sources.
Warburg Pincus, ESR, Sabana and ESR-REIT declined to comment. The sources requested anonymity as the talks are private.
As one of Asia’s biggest owners of logistics properties with assets in China, Japan and South Korea, ESR is aiming to spearhead a consolidation among Singapore REITS by taking advantage of its scale and deep funding, the sources said.

Singapore’s industrial REITS sector is crowded with smaller companies such as Sabana REIT, ESR-REIT and Soilbuild Business Space REIT which have found it challenging to grow their assets in the last few years, analysts said.

“I think they should either come together or sooner or later they could be bought out by someone who has deeper pockets and then consolidate across pan-Asia,” said Alan Cheong, senior director at consultancy Savills Research,” referring to smaller REITs.

REITs get their earnings from rentals and pay out most of their taxable income as dividends to investors.

One of the sources said ESR is expected to hold discussions with large shareholders in other Singapore REITS with a view to consolidating ownership in the companies.

Sabana REIT and ESR-REIT are trading at discounts to their book values while Soilbuild is trading at book value.
Larger firms such as Temasek-owned Ascendas REIT, Mapletree Logistics Trust and Mapletree Industrial Trust are coping much better in the downturn.

“Most of the smaller guys operate warehouses, logistics properties and factories where the occupancy has been declining and the challenges will continue easily over six-nine months before we see any recovery,” said Moody’s analyst Rachel Chua, adding that business parks are expected to fare better.

Sabana came under criticism from some investors this year after its already-underperforming unit price fell further in December following a fund raising announced by the company to finance its acquisitions.

Then Sabana’s manager set up a strategic review to explore options to boost Sabana’s performance and also terminated the acquisitions. Last week, Sabana said it was still evaluating non-binding proposals from several parties.