Summary Aareal Bank Group is active in the institutional housing sector via its Consulting/Services seg- ment. The segment offers the institutional housing sector services and products for managing residential property portfolios, through its wholly- owned subsidiary Aareon AG and the bank's Institutional Housing Business (see page 54). We seized on the topics relevant to the industry that were listed in the section on "Institutional Housing Sector" early on, and took proactive steps to deal with them. They are a continuous part of further developing the products and services of this segment (see business development, page 70 ff). Group profitability In an extremely difficult year for the financial sector as a whole, Aareal Bank Group achieved operating profit of 117 million in 2008 (adjus- ted 153 million; 2007: 380 million, adjusted 159 million). Taking taxes and minority interest income into consideration, consolidated net income after minority interests was 60 million (2007: 290 million). Net interest income rose by 14.8 % over the prev- ious year, to 472 million (2007: 411 million). The increase is largely attributable to higher margins achieved, the replacement of senior un- secured issues with Pfandbriefe, and the more favourable interest rate environment. Considering the allowance for credit losses of 80 million (2007: 77 million), net interest income after allowance for credit losses amounted to 392 million (2007: 334 million). This equates to an increase of more than 17 %. Net commission income increased also, by 8 million compared with the same period of the previous year, from 142 million in 2007 to 150 million. Both segments contributed to the increase. of the 2007 Energy Savings Ordnance (Energie- einsparverordnung ­ EnEV), while the use of other energy supply solutions also gained in impor- tance. Besides the EnEV and the introduction of the mandatory statement of energy usage, various other legal regulations impacted on the German housing sector in 2008; these include the busi- ness tax reform for 2008 (especially the interest cost deduction barrier and withholding tax) and the EU anti-terror regulations (especially the prohibition of business transactions). The market for residential property transactions has been made considerably more difficult by the financing environment, which is characterised by the financial markets crisis and economic outlook. The considerable trading activity volume of the last few years was followed by a significant drop in the number of portfolio sales during 2008. The size of the transactions also declined. Apart from the sale of LEG NordrheinWestfalen with 93,000 apartments, most trades consisted of packages with fewer than 3,000 residential units. Despite falling transaction volumes, international financial investors remained committed to the German property market. However, they are meanwhile more focused on inventory management, rather than selling on the properties. Some short-term oriented investors, who had entered the market with very optimistic return targets, overestimated the potential for privatising rental property or increasing rents. The housing market continues to recover at a moderate pace. According to surveys carried out by the consulting firm F+B Forschung, average rents in all cities and rent levels in Germany were up by 1.7 % over 2007. Apartment vacancies con- tinued to fall. However, the potential for increasing rents ­ and the vacancy ratios ­ differ widely by region. While apartment block vacancies contin- ued to rise, especially in rural regions, the ratio fell in the cities. The gap between rents com- manded in growth centres and those in rural or weak economic regions widened further. 64 Aareal Bank Group ­ Annual Report 2008 | Group Management Report