Convertible sukuks are Shari'ah-compliant bonds that can be converted into common units of a REIT or corporation.
Convertible sukuks are issued for the same reason that convertible perpetual preferred units exist (CPPUs) – credit rating.
Defaulting on a sukuk would inflict the same kind of damage to the REIT’s credit rating should it default on a bond issue.
To reduce this risk, REITs that need to adhere to Shari'ah-compliant standards issue convertible sukuks instead as the REIT is not obligated to a stipulated time frame to repay the capital raised, unlike regular sukuks.
As and when the time is most conducive, the convertible sukuks can be recalled in exchange for units in the REIT or corporation.
This entry is part of REITsWeek's glossary of REITs and real estate investment terms.