Islamic REITs in Indonesia? Not yet.

Malaysia's oldest Islamic REIT may be looking to Indonesia for growth, which makes sense, although real estate prices have risen quickly recently and regulatory impediments remain relating to the tax treatment of REITs and rules about foreign ownership of land.  Islamic REITs may offer similar returns (i.e. regular dividends) to sukuk, and should provide an investment that pass through the risks and rewards from the underlying assets directly to investors (which most sukuk are structured to avoid). 

One area of caution around comparing REITs to sukuk is that many REITs invest in buildings using debt (presumably Shari'ah-compliant debt in an Islamic REIT) to generate leverage, which in the case of a market that has risen substantially ("The average value of industrial land in greater Jakarta surged 76 percent last year, while the cost of apartments increased 11 percent, according to a Bank Indonesia survey. "), poses greater risk than an asset-based sukuk where the return is not primarily dependent on the value of that underlying asset (and where leverage is absent for the investor, and more explicitly reported for the company issuing the sukuk in their financials).

Another potential area to keep an eye on with Islamic REITs is whether they are being used by investors as an explicit substitute for sukuk (e.g. by takaful or pension funds) given the shortage of the latter.  The fall-out from the global financial crisis was that it led to a subsequent debt crisis in Dubai, which also had a highly leveraged real estate sector that had moved into bubble terms.  The financial institutions which fared the worst in this crisis were those with too much exposure to real estate and those that were most leveraged.  Islamic financial institutions are in particular susceptible to this bias towards real estate since it provides a tangible asset that is the easiest to incorporate into a Shari'ah-compliant structure.