BUSINESSES setting up offices in Bombay now have to contend with the third most expensive real estate prices in the world. According to Business South Asia, a new monthly management newsletter launched this week by the Economist Intelligence Unit (EIU), land prices in India's financial and industrial capital trail only those of Tokyo and Hong Kong. Land prices in the city have increased on average 50 to 60 per cent in the last year, with certain areas doubling in market value, the report says. India's market-orientated reforms have led to a surge in foreign investment and up to one-third of all foreign investments have been drawn to the state of Maharashtra, of which Bombay is the capital. In the past 15 months, the state has attracted investment proposals worth US$30 billion. The report notes that while a lot of the foreign investment is technically going outside Bombay, companies entering the state, such as Coca-Cola, Kellogg and General Electric, normally run an office in the city. Not surprisingly then, Bombay's spiralling costs are the result of rapidly increasing demand chasing short supply. 'With the highest urban population in India [13 million] and the largest influx of migrants, housing in the city has always been insufficient,' the report says. 'The influx of foreign companies and the substantial property investments of Indians residents overseas has meanwhile strengthened demand for quality residential and office space.' However, the sharp increases in rents is only one problem. New tenants have to pay a hefty sum up front when they lease premises because Bombay's leasing system requires payment of all rent in advance for the entire lease period. In addition, companies have to put up a refundable deposit of 30 to 40 per cent of the market value of the property. Business South Asia cites the case of a multinational food company that had to lay down 100 million rupees (about HK$25.3 million) in rents and deposits on office space and residential accommodation for eight executives in the city's central business district. One solution lies in buying rather than leasing. 'While most multinationals decide against buying property to avoid tying up funds in non-productive assets, it is a strong option in Bombay - their money will only sit idly with landlords otherwise,' says the report. The most expensive area is the central business district in south Bombay but most companies prefer to be located there because of the good infrastructure. However, the report says finding office space in the area is not easy because there is a ban on the construction of new commercial premises and almost half of all office space is not worth considering because of poor conditions and disputed ownership rights. It says that shortage of space means that prices in the most prestigious buildings, such as the World Trade Centre in Cuffe Parade, can be up to 50 per cent higher than the market average. One piece of good news for expatriates and their families relocating to Bombay is that excluding the cost of property, the cost of living in the city is estimated to be two and a half times cheaper than Hong Kong. Besides India, Business South Asia covers economic and business issues in Pakistan and Sri Lanka.