SINGAPORE: Deals to take private Singapore's real estate investment trusts (REITs) are expected to gain momentum as the companies reel under rising interest rates and fierce competition to buy assets, bankers and analysts said.

The trend in the sector, which is worth $7 billion, was underscored by a proposal this week by Frasers Property Ltd (FPL), part of Thai tycoon Charoen Sirivadhanabhakdi's TCC Group. FPL wants to take private its unit Frasers Hospitality Trust in a deal that values the target at $1.35 billion ($973 million).

Hospitality REITs count large groups as their main shareholders. There has been a wave of consolidation among REITs in other sectors over the past couple of years as companies have sought scale and have expanded overseas.

Prospects of a surge in take-private deals come against the backdrop of the industry's damage from the COVID-19 pandemic and its disruption to travel and tourism.

"For the moment, hospitality and retail REITs which are sub-scale and trade at a big discount to now-lower net asset value (NAV) may be targets," said Quiddity Advisors analyst Travis Lundy, who publishes on the Smartkarma research platform.

Singapore's REIT market is dominated by retail investors attracted to the firms' high dividends. REITs in Singapore must pay out 90% of their rental income, whereas a similar form of investment, called property trusts, need not.

"In hospitality REITs and commercial REITs, takeovers are scale-merit opportunities but take-privates like Frasers are really more about corporate strategy and opportunism than about industrial logic," said Lundy.

Singapore had 44 REITs and property trusts with a combined market value of S$117 billion, according to Singapore Exchange research published in May.

Frasers Hospitality Trust (FHT) has the second least valuable collection of assets among five listed hospitality trusts on the Singapore bourse. Others include Ascott Residence Trust, CDL Hospitality Trusts and Far East Hospitality Trust.

The other is diversified OUE Commercial REIT, which has investments in both commercial and hospitality sectors.

FHT's net asset value has declined since its listing in 2014, partly because of the sector's muted growth and the strengthening of the Singapore dollar against its operating currencies, it and FPL said.

"The proposed privatization of Frasers Hospitality Trust by its sponsor should result in a positive kneejerk reaction on hospitality S-REITs (REITs in Singapore) which are still trading at discounts to their NAVs as valuation plays catch-up in the face of the ongoing hospitality recovery," said Citi analyst Brandon Lee.

He said in a report he expected the deal to result in "deeper evaluation by sponsors managing REITs currently trading at deep discounts to NAVs, as assets under management growth becomes increasingly challenging in the face of the rising cost of capital, especially for the smaller ones."

The offer price of S$0.70 a share for FHT represented a 44% premium to its volume-weighted average price in the 12 months to April 7, the day before a strategic review was announced.

The offer valued it at 1.07 times its NAV, while FHT's peers trade at lower valuations, analysts said. FHT said its small size had limited its ability to reap benefits from its listing.

"There's so much competition to buy assets, even from private equity players. With interest rates rising, funding assets to boost scale becomes even more challenging," said one banker familiar with REIT deals. ($1 = 1.3896 Singapore dollars) (Reporting by Anshuman Daga; Additional reporting by Gaurav Dogra in Bengaluru; Editing by Sumeet Chatterjee and Bradley Perrett)