Warburg Pincus-backed e-Shang Redwood (ESR) is in advanced talks to buy struggling Sabana Shariah Compliant Industrial Reit, in a likely first consolidation step in Singapore's US$3.5 billion (S$4.8 billion) mid-cap industrial trusts sector.

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

Sabana's units yesterday jumped by 10.1 per cent to 49 cents - their highest in nearly four months - before the trust manager asked for a trading halt. More than 6.5 million units were traded, seven times the 30-day average volume.

In a statement after the market closed, the trust manager, Sabana Real Estate Investment Management, said it is in discussions with ESR Funds Management "to explore options in connection with our strategic review".

"At this point, Sabana Reit has not entered into any definitive legally binding agreement with ESR-Reit. Accordingly, there can be no assurance that any transaction or agreements will eventually materialise pursuant to these discussions."

ESR announced in March a 5 per cent stake in Sabana Reit, which has assets of about $1 billion comprising warehouses, logistics and high-tech industrial properties. Late last year, it agreed to buy up to 10.65 per cent of another industrial Reit, Cambridge Industrial Trust, later renamed ESR-Reit. In January, ESR bought an 80 per cent 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.

"These are strategic investments by ESR. The next step is a consolidation of subscale Reits," said one of the sources.

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 Mr Alan Cheong, senior director at consultancy Savills Research, referring to smaller Reits.

One source said ESR is expected to hold discussions with large shareholders in other Singapore Reits with a view to consolidating ownership in the firms.

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 after its already-underperforming unit price fell further in December, following a fund raising announced by the firm to finance 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.

REUTERS