China is moving closer towards a publicly listed equity real estate investment trust, but its complicated tax regime will hold back initial success, industry experts said. In June, the authorities allowed No 1 developer China Vanke to sell the country's first public fund linked to property rental income in a step towards the long-awaited introduction of reits in China as an investment alternative to stocks, bonds and money market products. There had been other trials but all were mortgage or hybrid reits. "We expect China to have its real equity reit on a trial basis within a year," Tan Huajie, Vanke's board secretary, said last week. "The policymakers have accumulated some experience through previous trials … There are a few hard knots to be unravelled, [including whether China can impose neutral tax rules at the beginning]. So whether China can push out reits on a large scale depends on the implementation of other measures." The fund launched by Vanke plans to invest half its money in an office project built by the Shenzhen-based developer in Qianhai. It will reap full rental income in the project until July 2023. The rest of the funds will be invested in stocks, bonds and money market products. After 10 years, the closed-end fund will become a listed open-ended fund. "The momentum is growing," said Peter Verwer, the chief executive of the Asia-Pacific Real Estate Association, who has been advising governments in the region on reits. His association, the National Association of Real Estate Investment Trusts in the United States and the European Public Real Estate Association helped in the establishment of the China Reits Alliance in Beijing in December. Verwer told the South China Morning Post that China had a chance to leapfrog the reit regimes elsewhere if it could introduce tax neutrality to engage retail investors. Tax rules are key to the success of a country's reit regime. Singapore's reit market is enjoying a boom mainly because of various tax exemptions for investors. For example, the city state announced earlier this year it would renew the concessionary income tax rate of 10 per cent for foreign non-individual investors for five more years until March 2020. However, both Verwer and Tan agreed it was hard for China as it was going through complicated reforms to overhaul its tax regime. In the property sector, the government has yet to replace the business tax with the value-added tax as part of a nationwide reform that started in 2012. It is also drafting a law to impose a withholding tax against owners of multiple, spacious or expensive homes. There are also talks to simplify various types of property-related taxes and fees. None of these reforms could be done easily or anytime soon, particularly when the broader economy was slowing and the authorities had been trying hard to stabilise the stock and currency markets, analysts said. If Beijing were to allow reits soon, one merit for foreign investors would be even lower interest rates, said Verwer. "Onshore debts are attractive." The recent equity rout is driving liquidity to the bond market, pushing down debt costs for developers, which are flocking to issue domestic bonds at much lower rates than offshore.