Could be instanced and a way to incorporate it could be. . .
Have an area on map that is mist/fog laden where no matter how you approach the fog you will see faint onlines of islands within the fog.
As you enter the fog and are shrouded and making your way through, you are brought into your instance. You immerge on the other side of the fog bank approaching your island.
Different people going into and out of the fog would be coming or going into their own instance (just as people using the same door to a house would in instanced housing in mmo's). Entering and then returning from your island may or may not return you to the main world you left before going "home". This could be a way for Rare to address keeping shards/server pops at capacity.
To keep griefing/abuse at bay, you would only be able to "enter" your instance by going into the fog if you are not currently engaged in pitched battle and/or don't have any treasure on board. If either of those criteria are not met, you would simply come out the other side of the fog and continue on your way or continue the fight (This would also be the case for pirates that don't own islands). If you did own one and didn't wish to visit your island, you would just go around the fog bank (not enter it).
For the dev, they'd only have to dedicate a small'ish area on the overall map for the mist/fog bank and then an instanced globe with an "island slot" in a clearing in the middle of a fog shroud (would just be a plug in for whatever island "types/models" they decide to offer for purchase or reward)
Would be a cool way to implement "housing" (islanding?) into the game that would seem more natural without having thousands of little islands popping up all over the map, etc. :)