Malaysia’s REITs in the Era of Financial Turbulence

Abstract

Real estate investment trust (REIT) in Malaysia is a relatively new investment vehicle. Islamic REIT is defined as REIT that operates within the parameters of the shari’ah rules. In this study, we examine whether the Islamic REIT serves as a compliment or a substitute for stock market shares. We rely on the autoregressive distributed lag technique to estimate the impact of stock market proxied by the Kuala Lumpur composite index (KLCI) along with a host of control variables. Results suggest that the Islamic REIT complements the stock market and its movements almost mirror the stock market. Bonds, on the other hand, have no statistically significant impact on the Islamic REIT. The results provide an important insight to the relation between Islamic REIT and the stock market; and carries important policy implications for portfolio management. In this case, investors looking for shari’ah compliant investment may rely on the Islamic REIT to diversify their portfolios. However, they should also bear in mind that during financial turbulence, the Islamic REIT would not be able to cushion any downward effect of the stock market due to its complimentary effect. The total clustering errors reduced significantly whereas interdistances between clusters are preserved to be as large as possible for better clusters identification.