UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: 811-09117

Morgan Stanley Real Estate Fund
(Exact name of registrant as specified in charter)

1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)

Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)

Registrant's telephone number, including area code: 212-762-4000

Date of fiscal year end: November 30, 2005

Date of reporting period: May 31, 2005

Welcome, Shareholder:

In this report, you'll learn about how your investment in Morgan Stanley Real
Estate Fund performed during the semiannual period. We will provide an overview
of the market conditions, and discuss some of the factors that affected
performance during the reporting period. In addition, this report includes the
Fund's financial statements and a list of Fund investments.

THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING
OFFERED.

MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS
SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE
INFORMATION ON INVESTMENT RISKS.

FUND REPORT

For the six-month period ended May 31, 2005

TOTAL RETURN FOR THE 6 MONTHS ENDED MAY 31, 2005

<Table>
<Caption>
NAREIT LIPPER REAL
EQUITY ESTATE FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2)

8.24% 7.79% 7.89% 8.35% 6.20% 7.35%
</Table>

THE PERFORMANCE OF THE FUND'S FOUR SHARE CLASSES VARIES BECAUSE EACH HAS
DIFFERENT EXPENSES. THE FUND'S TOTAL RETURNS ASSUME THE REINVESTMENT OF ALL
DISTRIBUTIONS BUT DO NOT REFLECT THE DEDUCTION OF ANY APPLICABLE SALES CHARGES.
SUCH COSTS WOULD LOWER PERFORMANCE. SEE PERFORMANCE SUMMARY FOR STANDARDIZED
PERFORMANCE AND BENCHMARK INFORMATION.

MARKET CONDITIONS

After posting very strong returns in 2004, the U.S. REIT sector entered 2005 on
a weak footing which continued through the first quarter of the year. Several
factors contributed to the sector's weakness in the first quarter, including
profit-taking and portfolio rebalancing on the part of institutional portfolio
managers to lock in gains from 2004, the rise in the yield on the 10-year
Treasury and weakness in the broader equity market. The REIT sector went on to
rally in both April and May thanks to a combination of drivers including the
decline in the 10-year Treasury yield, the continued strengthening of underlying
real estate asset values and continued improvement in real estate fundamentals.

Among the major U.S. REIT sectors, retail and office stocks outperformed while
apartment stocks lagged. In the retail sector, both tenants and landlords
remained optimistic with regard to the fundamentals for both retailers and
retail real estate. Retail remains the one sector within real estate where
landlords retain pricing power and properties continue to produce improving
operating cash flow. The outperformance of the office sector appeared to be due
to investor optimism for a recovery in the sector, as fundamentals appeared to
have finally stopped deteriorating. Office stocks may have also benefited from
the fact that the office sector posted the weakest relative performance in 2004,
and was therefore less impacted by the significant profit-taking witnessed in
the first quarter of 2005.

In the apartment sector, investors appear to expect gradual improvements in
operational conditions in 2005 on the back of positive economic and job growth.
However, the sector underperformed during the reporting period due to investors'
disappointment with the slow pace of recovery and concerns that low interest
rates and modest employment growth will continue to weigh on tenant demand. In
addition, the apartment sector appeared to be hit hardest by profit-taking,
given that last year's winners were among the weakest relative performers during
the six-month period. The investment market for apartment assets remains strong,
primarily due to continued demand from condominium converters.

Among the smaller REIT sectors, storage was the best performing sector, and the
hotel, health care and specialty sectors underperformed. Both the storage and
hotel sectors experienced improvements in operating results and benefited from
the short-term nature of their leases and relatively limited new supply.
However, hotel REITs were hurt by investor concerns that a slower economy could
impact demand as well as profit-taking following their strong fourth-quarter
rally in 2004.

PERFORMANCE ANALYSIS

Morgan Stanley Real Estate Fund outperformed the NAREIT Equity Index and the
Lipper Real Estate Funds Index for the six-month period ended May 31, 2005,
assuming no deduction of applicable sales charges. The Fund's outperformance was
driven by both bottom-up stock selection and top-down sector allocation. The
Fund's stock selection was especially strong in the hotel, retail and apartment
sectors. Within the hotel sector, the Fund focused on hotel companies that own
upscale assets in major urban markets. These holdings experienced a strong
recovery thanks to an increase in corporate travel. In retail, the Fund
benefited from strong performance in mall stocks because of its strategy of
emphasizing owners of the highest quality malls in dominant trade areas. Returns
were also boosted by holdings in strip center malls, where the Fund emphasized
owners of in-fill centers with appealing anchor tenants. Within the apartment
sector, the Fund's strategy of holding companies with strong representation in
the coastal markets proved to be a winning approach.

From a top-down perspective, allocation was favorable across virtually every
sector. The most significant favorable contributors to outperformance were from
an overweight to the storage and mall sectors and underweight to the mixed
office/industrial sector relative to the NAREIT Index.

While the Fund performed strongly for the period, not all of its positions
contributed positively to its returns. In the office sector, the Fund's returns
were hampered modestly by underweighted positions relative to the NAREIT Equity
Index in specific office companies. Stock selection in the healthcare sector
also detracted from performance.

There is no guarantee that any sectors mentioned will continue to perform well
or be held by the Fund in the future.

<Table>
<Caption>
TOP 10 HOLDINGS

Simon Property Group Inc. L.P. 9.7%
Brookfield Properties Corp. (Canada) 5.8
Avalonbay Communities, Inc. 5.8
Boston Properties, Inc 5.3
Archstone-Smith Trust 5.2
Starwood Hotels & Resorts Worldwide, Inc. 5.0
Host Marriot Corp. 4.8
Hilton Hotels Corp. 4.3
Federal Realty Investment Trust 3.7
Regency Centers Corp. 3.6
</Table>

<Table>
<Caption>
PORTFOLIO COMPOSITION

Common Stocks 98.8%
Short-Term Paper 1.1
</Table>

Data as of May 31, 2005. Subject to change daily. All percentages for top 10
holdings are as a percentage of net assets and all percentages for portfolio
composition are as a percentage of total investments. These data are provided
for informational purposes only and should not be deemed a recommendation to buy
or sell the securities mentioned. Morgan Stanley is a full-service securities
firm engaged in securities trading and brokerage activities, investment banking,
research and analysis, financing and financial advisory services.

INVESTMENT STRATEGY

THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN INCOME
PRODUCING COMMON STOCKS AND OTHER EQUITY SECURITIES (WHICH MAY INCLUDE
CONVERTIBLE SECURITIES) OF COMPANIES THAT ARE PRINCIPALLY ENGAGED IN THE U.S.
REAL ESTATE INDUSTRY. A COMPANY IS CONSIDERED TO BE "PRINCIPALLY ENGAGED" IN THE
U.S. REAL ESTATE INDUSTRY IF (I) IT DERIVES AT LEAST 50 PERCENT OF ITS REVENUES
OR PROFITS FROM THE OWNERSHIP, LEASING, CONSTRUCTION, MANAGEMENT, DEVELOPMENT,
FINANCING OR SALE OF RESIDENTIAL, COMMERCIAL OR INDUSTRIAL REAL ESTATE; OR (II)
IT HAS AT LEAST 50 PERCENT OF THE VALUE OF ITS ASSETS INVESTED IN U.S.
RESIDENTIAL, COMMERCIAL OR INDUSTRIAL REAL ESTATE. COMPANIES PRIMARILY ENGAGED
IN THE REAL ESTATE INDUSTRY MAY INCLUDE REAL ESTATE INVESTMENT TRUSTS KNOWN AS
"REITS," WHICH POOL INVESTOR FUNDS MOSTLY FOR INVESTMENT IN COMMERCIAL REAL
ESTATE PROPERTIES. THEY ALSO MAY INCLUDE, AMONG OTHER BUSINESSES, REAL ESTATE
DEVELOPERS, BROKERS AND OPERATING COMPANIES, AS WELL AS COMPANIES WHOSE PRODUCTS
AND SERVICES ARE SIGNIFICANTLY RELATED TO THE REAL ESTATE INDUSTRY, SUCH AS
BUILDING SUPPLIERS AND MORTGAGE LENDERS. IN DECIDING WHICH SECURITIES TO BUY,
HOLD OR SELL, THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT
ADVISORS INC., CONSIDERS MARKET, ECONOMIC AND POLITICAL FACTORS.

FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS

EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON

FORM N-CSR. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO
FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE,
WWW.MORGANSTANLEY.COM. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE
OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL
QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST
AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE
MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM N-Q FILINGS
(AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE,
HTTP://WWW.SEC.GOV. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S
PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU
CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE,
BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (PUBLICINFO@SEC.GOV) OR BY
WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102.

PROXY VOTING POLICIES AND PROCEDURES

A DESCRIPTION OF (1) THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE
VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES AND (2) HOW THE
FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT
12-MONTH PERIOD ENDED JUNE 30, 2004, IS AVAILABLE WITHOUT CHARGE BY VISITING THE
MUTUAL FUND CENTER ON OUR WEB SITE AT WWW.MORGANSTANLEY.COM. THIS INFORMATION IS
ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT
HTTP://WWW.SEC.GOV.

HOUSEHOLDING NOTICE

TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE
MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN
SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY
MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS.
YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME
UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE
DOCUMENTS BY CALLING (800) 350-6414, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR
CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING
INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS.

PERFORMANCE SUMMARY

AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED MAY 31, 2005

<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES(+) CLASS D SHARES(++)
(since 04/28/99) (since 04/28/99) (since 04/28/99) (since 04/28/99)
SYMBOL REFAX REFBX REFCX REFDX

1 YEAR 34.91%(3) 33.87%(3) 34.01%(3) 35.20%(3)
27.83(4) 28.87(4) 33.01(4) --
5 YEARS 19.62(3) 18.67(3) 18.70(3) 19.85(3)
18.33(4) 18.47(4) 18.70(4) --
SINCE INCEPTION 16.10(3) 15.20(3) 15.21(3) 16.39(3)
15.08(4) 15.20(4) 15.21(4) --
</Table>

Performance data quoted represents past performance, which is no guarantee of
future results and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
morganstanley.com or speak with your financial advisor. Investment returns and
principal value will fluctuate and fund shares, when redeemed, may be worth more
or less than their original cost. The table does not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption of
fund shares. Performance for Class A, Class B, Class C, and Class D shares will
vary due to differences in sales charges and expenses.

* The maximum front-end sales charge for Class A is 5.25%.

** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The
CDSC declines to 0% after six years.

+ The maximum contingent deferred sales charge for Class C is 1% for shares
redeemed within one year of purchase.

++ Class D has no sales charge.

(1) The NAREIT Equity Index measures the performance of real estate securities,
which will fluctuate with changes in the values of their underlying
properties. The Index is an unmanaged benchmark of real estate investment
trusts compiled by the National Association of Real Estate Investment
Trusts. Indexes are unmanaged and their returns do not include any sales
charges or fees. Such costs would lower performance. It is not possible to
invest directly in an index.

(2) The Lipper Real Estate Funds Index is an equally weighted performance index
of the largest qualifying funds (based on net assets) in the Lipper Real
Estate Funds classification. The Index, which is adjusted for capital gains
distributions and income dividends, is unmanaged and should not be
considered an investment. There are currently 30 funds represented in this
Index.

(3) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.

(4) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.

EXPENSE EXAMPLE

As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments and redemption fees;
and (2) ongoing costs, including management fees; distribution and service
(12b-1) fees; and other Fund expenses. This example is intended to help you
understand your ongoing costs (in dollars) of investing in the Fund and to
compare these costs with the ongoing costs of investing in other mutual funds.

The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 12/01/04 - 05/31/05.

ACTUAL EXPENSES

The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.

HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES

The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) and redemption fees. Therefore, the second line of the table is
useful in comparing ongoing costs, and will not help you determine the relative
total cost of owning different funds. In addition, if these transactional costs
were included, your costs would have been higher.

<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
12/31/04 -
12/01/04 05/31/05 05/31/05
------------- ------------- ---------------

CLASS A
Actual (8.24% return)....................................... $1,000.00 $1,082.40 $ 7.58
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,017.65 $ 7.34
CLASS B
Actual (7.79% return)....................................... $1,000.00 $1,077.90 $11.55
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,013.81 $11.20
CLASS C
Actual (7.89% return)....................................... $1,000.00 $1,078.90 $11.20
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,014.16 $10.85
CLASS D
Actual (8.35% return)....................................... $1,000.00 $1,083.50 $ 6.39
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,018.80 $ 6.19
</Table>

- ------------------

* Expenses are equal to the Fund's annualized expense ratio of 1.46%, 2.23%,
2.16% and 1.23% respectively, multiplied by the average account value over
the period, multiplied by 182/365 (to reflect the one-half year period).

INVESTMENT ADVISORY AGREEMENT APPROVAL

NATURE, EXTENT AND QUALITY OF SERVICES

The Board of Trustees of the Funds (the "Board") reviewed and considered the
nature and extent of the investment advisory services provided by the Investment
Adviser under the Advisory Agreement, including portfolio management, investment
research and equity and fixed income securities trading. The Board also reviewed
and considered the nature and extent of the non-advisory, administrative
services provided by the Fund's Administrator under the Administration
Agreement, including accounting, clerical, bookkeeping, compliance, business
management and planning, and the provision of supplies, office space and
utilities. (The Investment Adviser and the Administrator together are referred
to as the "Adviser" and the Advisory and Administration Agreements together are
referred to as the "Management Agreement.") The Board also compared the nature
of the services provided by the Adviser with similar services provided by
non-affiliated advisers as reported to the Board by Lipper Inc. ("Lipper").

The Board reviewed and considered the qualifications of the portfolio managers,
the senior administrative managers and other key personnel of the Adviser who
provide the administrative and investment advisory services to the Fund. The
Board determined that the Adviser's portfolio managers and key personnel are
well qualified by education and/or training and experience to perform the
services in an efficient and professional manner. The Board concluded that the
nature and extent of the advisory and administrative services provided were
necessary and appropriate for the conduct of the business and investment
activities of the Fund. The Board also concluded that the overall quality of the
advisory and administrative services was satisfactory.

PERFORMANCE RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS

The Board reviewed the Fund's performance for one-, three- and five-year periods
ended November 30, 2004, as shown in reports provided by Lipper (the "Lipper
Reports"), compared to the performance of comparable funds selected by Lipper
(the "performance peer group"), and noted that the Fund's performance was lower
than its performance peer group average for the three-and five-year periods, but
better for the one-year period. The Board discussed the improved performance
during the most recent one-year period and concluded that overall the Fund's
performance was satisfactory.

FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS

The Board reviewed the management fee rate and the total expense ratio of the
Fund. The Board noted that: (i) the Fund's management fee rate was slightly
higher than the average management fee rate for funds, selected by Lipper (the
"expense peer group"), managed by other advisers with investment strategies
comparable to those of the Fund, as shown in the Lipper Report for the Fund, and
(ii) the Fund's total expense ratio was slightly lower than the average total
expense ratio of the funds included in the Fund's expense peer

group. The Board concluded that the Fund's management fee and total expenses
were competitive with those of the Fund's expense peer group.

FEES RELATIVE TO OTHER FUNDS MANAGED BY THE ADVISER WITH COMPARABLE INVESTMENT
STRATEGIES

The Board reviewed the advisory and administrative fees (together, the
"management fee") paid by the Fund under the Management Agreement. The Board
noted that the rate was comparable to the management fee rates charged by the
Adviser to any other funds it manages with investment strategies comparable to
those of the Fund.

BREAKPOINTS AND ECONOMIES OF SCALE

The Board reviewed the structure of the Fund's management fee schedule under the
Management Agreement and noted that it includes breakpoints. The Board also
reviewed the level of the Fund's management fee and noted that the fee, as a
percentage of the Fund's net assets, would decrease as net assets increase
because the management fee includes breakpoints. The Board concluded that the
Fund's management fee would reflect economies of scale as assets increase.

PROFITABILITY OF ADVISER AND AFFILIATES

The Board considered and reviewed information concerning the costs incurred and
profits realized by the Adviser and its affiliates during the last two years
from their relationship with the Fund and the Morgan Stanley Fund Complex and
reviewed with the Controller of the Adviser the cost allocation methodology used
to determine the Adviser's profitability. Based on their review of the
information they received, the Board concluded that the profits earned by the
Adviser and its affiliates were not excessive in light of the advisory,
administrative and other services provided to the Fund.

FALL-OUT BENEFITS

The Board considered so-called "fall-out benefits" derived by the Adviser and
its affiliates from their relationship with the Fund and the Fund Complex, such
as "float" benefits derived from handling of checks for purchases and
redemptions of Fund shares through a broker-dealer affiliate of the Adviser and
"soft dollar" benefits (discussed in the next section). The Board also
considered that a broker-dealer affiliate of the Adviser receives from the Fund
12b-1 fees for distribution and shareholder services. The Board also considered
that an affiliate of the Adviser, through a joint venture, receives revenue in
connection with trading done on behalf of the Fund through an electronic trading
system network ("ECN"). The Board concluded that the float benefits and the
above-referenced ECN-related revenue were relatively small and that the 12b-1
fees were competitive with those of other broker-dealer affiliates of investment
advisers of mutual funds.

SOFT DOLLAR BENEFITS

The Board considered whether the Adviser realizes any benefits as a result of
brokerage transactions executed through "soft dollar" arrangements. Under such
arrangements, brokerage commissions paid by the Fund and/or other funds managed
by the Adviser would be used to pay for research that a securities broker
obtains from third parties, or to pay for both research and execution services
from securities brokers who effect transactions for the Fund. The Adviser
informed the Board that it does not use Fund commissions to pay for third party
research. It does use commissions to pay for research which is bundled with
execution services. The Board recognized that the receipt of such research from
brokers may reduce the Adviser's costs but concluded that the receipt of such
research strengthens the investment management resources of the Adviser, which
may ultimately benefit the Fund and other funds in the Fund Complex.

ADVISER FINANCIALLY SOUND AND FINANCIALLY CAPABLE OF MEETING THE FUND'S NEEDS

The Board considered whether the Adviser is financially sound and has the
resources necessary to perform its obligations under the Management Agreement.
The Board noted that the Adviser's operations remain profitable, although
increased expenses in recent years have reduced the Adviser's profitability. The
Board concluded that the Adviser has the financial resources necessary to
fulfill its obligations under the Management Agreement.

HISTORICAL RELATIONSHIP BETWEEN THE FUND AND THE ADVISER

The Board also reviewed and considered the historical relationship between the
Fund and the Adviser, including the organizational structure of the Adviser, the
policies and procedures formulated and adopted by the Adviser for managing the
Fund's operations and the Board's confidence in the competence and integrity of
the senior managers and key personnel of the Adviser. The Board concluded that
it is beneficial for the Fund to continue its relationship with the Adviser.

OTHER FACTORS AND CURRENT TRENDS

The Board considered the controls and procedures adopted and implemented by the
Adviser and monitored by the Fund's Chief Compliance Officer and concluded that
the conduct of business by the Adviser indicates a good faith effort on its part
to adhere to high ethical standards in the conduct of the Fund's business.

GENERAL CONCLUSION

After considering and weighing all of the above factors, the Board concluded it
would be in the best interest of the Fund and its shareholders to approve
renewal of the Management Agreement for another year.

Morgan Stanley Real Estate Fund
PORTFOLIO OF INVESTMENTS - MAY 31, 2005 (UNAUDITED)

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------

Common Stocks (98.8%)
Hotels/Resorts/ Cruiselines (9.6%)
361,409 Hilton Hotels Corp. ......................................................... $ 8,756,940
27,295 Interstate Hotels & Resorts Inc.*............................................ 125,557
41,300 Lodgian Inc.*................................................................ 392,350
178,550 Starwood Hotels & Resorts Worldwide, Inc. ................................... 9,993,444
8,000 Wyndham International, Inc. (Class A)*....................................... 7,680
------------
19,275,971
------------
Real Estate -- Industrial/ Office (5.8%)
447,052 Brookfield Properties Corp. (Canada)......................................... 11,735,115
------------
Real Estate -- Retail (1.2%)
38,780 Forest City Enterprise, Inc. (Class A)....................................... 2,456,713
------------
REIT -- Diversified (3.7%)
46,500 Spirit Finance Corp. ........................................................ 511,500
89,560 Vornado Realty Trust......................................................... 7,048,372
------------
7,559,872
------------
REIT -- Healthcare (1.5%)
4,800 Health Care Property Investors, Inc. ........................................ 130,512
18,200 LTC Properties, Inc. ........................................................ 360,724
67,995 OMEGA Healthcare Investors, Inc. ............................................ 812,540
90,100 Senior Housing Properties Trust.............................................. 1,620,899
100 Sunrise Senior Living (Canada)............................................... 923
------------
2,925,598
------------
REIT -- Industrial/ Office (23.1%)
172,865 AMB Property Corp. .......................................................... 6,968,188
168,580 Arden Realty, Inc. .......................................................... 5,782,294
159,290 Boston Properties, Inc. ..................................................... 10,638,979
</Table>

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------

27,650 Brandywine Realty Trust...................................................... $ 778,624
62,700 Catellus Development Corp. .................................................. 1,835,229
186,135 Equity Office Properties Trust............................................... 6,047,526
6,500 Highwoods Properties, Inc. .................................................. 178,880
98,000 Mack-Cali Realty Corp. ...................................................... 4,320,820
30,150 Prentiss Properties Trust.................................................... 1,040,175
43,925 ProLogis..................................................................... 1,793,897
28,350 PS Business Parks, Inc. (Class A)............................................ 1,163,484
97,020 Reckson Associates Realty Corp. ............................................. 3,064,862
35,100 SL Green Realty Corp. ....................................................... 2,174,445
39,400 Trizec Properties, Inc. ..................................................... 768,694
------------
46,556,097
------------
REIT -- Lodging/ Resorts (5.2%)
578,905 Host Marriott Corp. ......................................................... 9,696,659
104,555 MeriStar Hospitality Corp.*.................................................. 877,216
------------
10,573,875
------------
REIT -- Residential (18.4%)
13,205 American Campus Communities, Inc. ........................................... 270,703
8,500 Amli Residential Properties Trust............................................ 244,290
284,317 Archstone-Smith Trust........................................................ 10,468,552
155,875 Avalonbay Communities, Inc. ................................................. 11,670,361
28,435 BRE Properties, Inc. (Class A)............................................... 1,095,885
52,050 Equity Lifestyle Properties, Inc. ........................................... 1,972,695
99,470 Equity Residential........................................................... 3,570,973
59,230 Essex Property Trust, Inc. .................................................. 4,738,400
4,700 Gables Residential Trust..................................................... 171,127
88,750 Post Properties, Inc. ....................................................... 2,911,000
------------
37,113,986
------------
REIT -- Retail (23.9%)
61,750 Acadia Realty Trust.......................................................... 1,046,663
106,300 BPP Liquidating Trust*....................................................... 28,701
</Table>

11
See Notes to Financial Statements

Morgan Stanley Real Estate Fund
PORTFOLIO OF INVESTMENTS - MAY 31, 2005 (UNAUDITED) continued

<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ----------------------------------------------------------------------------------------------------------

4,965 Developers Diversified Realty Corp. ......................................... $ 226,404
134,220 Federal Realty Investment Trust.............................................. 7,408,944
31,280 General Growth Properties, Inc. ............................................. 1,217,730
20,500 Heritage Property Investment Trust........................................... 666,045
74,620 Macerich Co. (The)........................................................... 4,703,299
2,765 Pan Pacific Retail Properties, Inc. ......................................... 176,545
129,920 Regency Centers Corp. ....................................................... 7,256,032
284,684 Simon Property Group, Inc. .................................................. 19,563,484
190,195 Taubman Centers, Inc. ....................................................... 6,036,789
------------
48,330,636
------------
REIT -- Specialty (0.6%)
9,500 Capital Automotive REIT...................................................... 339,910
32,990 Correctional Properties Trust................................................ 857,740
------------
1,197,650
------------
REIT -- Storage (5.8%)
103,975 Public Storage, Inc. ........................................................ 6,252,017
122,630 Shurgard Storage Centers, Inc. (Class A)..................................... 5,352,800
------------
11,604,817
------------
Total Common Stocks
(Cost $122,483,609).......................................................... 199,330,330
------------
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ----------------------------------------------------------------------------------------------------------
Short-Term Investment (1.1%)
Repurchase Agreement
$ 2,206 Joint repurchase agreement account 3.04% due 06/01/05 (dated 05/31/05;
proceeds $2,206,186) (a)
(Cost $2,206,000)........................................................... $ 2,206,000
------------
Total Investments
(Cost $124,689,609) (b)......................................................... 99.9% 201,536,330
Other Assets in Excess of Liabilities........................................... 0.1 271,364
----- ------------
Net Assets...................................................................... 100.0% $201,807,694
===== ============
</Table>

- ---------------------------------------------------

<Table>

REIT Real Estate Investment Trust.
* Non-income producing security.
(a) Collateralized by federal agency and U.S. Treasury
obligations.
(b) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes.
The aggregate gross unrealized appreciation is
$76,913,019 and the aggregate gross unrealized
depreciation is $66,298, resulting in net
unrealized appreciation of $76,846,721.
</Table>

12
See Notes to Financial Statements

Morgan Stanley Real Estate Fund
SUMMARY OF INVESTMENTS - MAY 31, 2005 (UNAUDITED)

<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ----------------------------------------------------------------------------------------

Reit -- Retail.............................................. $ 48,330,636 23.9%
Reit -- Industrial/Office................................... 46,556,097 23.1
Reit -- Residential......................................... 37,113,986 18.4
Hotels/Resorts/Cruiselines.................................. 19,275,971 9.6
Real Estate -- Industrial/Office............................ 11,735,115 5.8
Reit -- Storage............................................. 11,604,817 5.8
Reit -- Lodging/Resorts..................................... 10,573,875 5.2
Reit -- Diversified......................................... 7,559,872 3.7
Reit -- Healthcare.......................................... 2,925,598 1.5
Real Estate -- Retail....................................... 2,456,713 1.2
Repurchase Agreement........................................ 2,206,000 1.1
Reit -- Specialty........................................... 1,197,650 0.6
------------ ----
$201,536,330 99.9%
============ ====
</Table>

See Notes to Financial Statements
13

Morgan Stanley Real Estate Fund
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
May 31, 2005 (unaudited)

<Table>

Assets:
Investments in securities, at value
(cost $124,689,609)....................................... $201,536,330
Cash........................................................ 769
Receivable for:
Investments sold........................................ 930,975
Dividends............................................... 283,107
Shares of beneficial interest sold...................... 220,807
Prepaid expenses and other assets........................... 49,493
------------
Total Assets............................................ 203,021,481
------------
Liabilities:
Payable for:
Shares of beneficial interest redeemed.................. 545,739
Investments purchased................................... 351,269
Investment advisory fee................................. 140,899
Distribution fee........................................ 102,496
Administration fee...................................... 14,090
Accrued expenses and other payables......................... 59,294
------------
Total Liabilities....................................... 1,213,787
------------
Net Assets.............................................. $201,807,694
============
Composition of Net Assets:
Paid-in-capital............................................. $112,506,583
Net unrealized appreciation................................. 76,851,779
Undistributed net investment income......................... 410,364
Accumulated undistributed net realized gain................. 12,038,968
------------
Net Assets.............................................. $201,807,694
============
Class A Shares:
Net Assets.................................................. $20,332,862
Shares Outstanding (unlimited authorized, $.01 par value)... 1,156,745
Net Asset Value Per Share............................... $17.58
============
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value)......... $18.55
============
Class B Shares:
Net Assets.................................................. $97,554,819
Shares Outstanding (unlimited authorized, $.01 par value)... 5,573,638
Net Asset Value Per Share............................... $17.50
============
Class C Shares:
Net Assets.................................................. $14,412,668
Shares Outstanding (unlimited authorized, $.01 par value)... 823,248
Net Asset Value Per Share............................... $17.51
============
Class D Shares:
Net Assets.................................................. $69,507,345
Shares Outstanding (unlimited authorized, $.01 par value)... 3,950,806
Net Asset Value Per Share............................... $17.59
============
</Table>

See Notes to Financial Statements
14

Morgan Stanley Real Estate Fund
FINANCIAL STATEMENTS continued

Statement of Operations
For the six months ended May 31, 2005 (unaudited)

<Table>

Net Investment Income:
Income
Dividends (net of $19,931 foreign withholding tax).......... $ 4,360,726
Interest.................................................... 29,459
-----------
Total Income............................................ 4,390,185
-----------
Expenses
Investment advisory fee..................................... 818,405
Distribution fee (Class A shares)........................... 14,894
Distribution fee (Class B shares)........................... 538,604
Distribution fee (Class C shares)........................... 67,851
Transfer agent fees and expenses............................ 236,101
Administration fee.......................................... 81,840
Shareholder reports and notices............................. 42,246
Professional fees........................................... 34,709
Registration fees........................................... 27,309
Custodian fees.............................................. 10,543
Trustees' fees and expenses................................. 1,242
Other....................................................... 8,602
-----------
Total Expenses.......................................... 1,882,346
-----------
Net Investment Income................................... 2,507,839
-----------
Net Realized and Unrealized Gain:
Net Realized Gain On Investments............................ 11,746,718
-----------
Net Change in Unrealized Appreciation on:
Investments................................................. 1,279,744
Translation of other assets and liabilities denominated in
foreign currencies........................................ 5,058
-----------
Net Appreciation........................................ 1,284,802
-----------
Net Gain................................................ 13,031,520
-----------
Net Increase................................................ $15,539,359
===========
</Table>

See Notes to Financial Statements
15

Morgan Stanley Real Estate Fund
FINANCIAL STATEMENTS continued

Statement of Changes in Net Assets

<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, 2005 NOVEMBER 30, 2004
------------ -----------------
(unaudited)

Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 2,507,839 $ 1,557,307
Net realized gain........................................... 11,746,718 16,856,003
Net change in unrealized appreciation....................... 1,284,802 36,629,782
------------ ------------
Net Increase............................................ 15,539,359 55,043,092
------------ ------------
Dividends and Distributions to Shareholders from:
Net investment income
Class A shares.......................................... (135,276) (102,372)
Class B shares.......................................... (914,326) (488,097)
Class C shares.......................................... (126,793) (62,756)
Class D shares.......................................... (920,987) (904,175)
Net realized gain
Class A shares.......................................... (678,646) (223,387)
Class B shares.......................................... (7,015,120) (2,964,660)
Class C shares.......................................... (939,689) (360,473)
Class D shares.......................................... (4,366,551) (1,697,666)
------------ ------------
Total Dividends and Distributions....................... (15,097,388) (6,803,586)
------------ ------------

Net decrease from transactions in shares of beneficial
interest.................................................. (11,021,103) (23,199,579)
------------ ------------
Net Increase (Decrease)................................. (10,579,132) 25,039,927
Net Assets:
Beginning of period......................................... 212,386,826 187,346,899
------------ ------------
End of Period
(Including undistributed net investment income of $410,364
and dividends in excess of net investment income of $93,
respectively)............................................... $201,807,694 $212,386,826
============ ============
</Table>

See Notes to Financial Statements
16

Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2005 (UNAUDITED)

1. Organization and Accounting Policies

Morgan Stanley Real Estate Fund (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "Act"), as a non-diversified, open-end
management investment company. The Fund's investment objective is to provide
high current income and long-term capital appreciation. The Fund was organized
as a Massachusetts business trust on November 23, 1998 and commenced operations
on April 28, 1999.

The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within eighteen
months, six years and one year, respectively. Class D shares are not subject to
a sales charge. Additionally, Class A shares, Class B shares and Class C shares
incur distribution expenses.

The following is a summary of significant accounting policies:

A. Valuation of Investments -- (1) an equity portfolio security listed or traded
on the New York Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) for equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day; (5) when market quotations are not
readily available or Morgan Stanley Investment Advisors Inc. (the "Investment
Adviser") determines that the latest sale price, the bid price or the mean
between the last reported bid and asked price do not reflect a security's market
value, portfolio securities are valued at their fair value as determined in good
faith under procedures established by and under the general supervision of the
Fund's Trustees. Occasionally, developments affecting the closing prices of
securities and other assets may occur between the times at which valuations of
such securities are determined (that is, close of the foreign market on which
the securities trade) and the close of business on the NYSE. If developments
occur during such periods that are expected to materially affect the value of
such securities, such valuations may be adjusted to reflect the estimated fair
value of such securities as of the close of the NYSE, as determined in good
faith by the Fund's Trustees or by the Investment

Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2005 (UNAUDITED) continued

Adviser using a pricing service and/or procedures approved by the Trustees of
the Fund; (6) certain portfolio securities may be valued by an outside pricing
service approved by the Fund's Trustees; and (7) short-term debt securities
having a maturity date of more than sixty days at time of purchase are valued on
a mark-to-market basis until sixty days prior to maturity and thereafter at
amortized cost based on their value on the 61st day. Short-term debt securities
having a maturity date of sixty days or less at the time of purchase are valued
at amortized cost.

B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Upon notification from issuers, some of the dividend income received from a REIT
may be redesignated as a reduction of cost of investments and/or realized gain.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.

C. Repurchase Agreements -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Adviser, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.

D. Multiple Class Allocations -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.

E. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.

F. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.

G. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.

Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2005 (UNAUDITED) continued

2. Investment Advisory/Administration Agreements

Pursuant to an Investment Advisory Agreement, the Fund pays the Investment
Adviser an advisory fee, accrued daily and payable monthly, by applying the
annual rate of 0.80% to the portion of daily net assets not exceeding $500
million; 0.75% to the portion of daily net assets exceeding $500 million but not
exceeding $1 billion; 0.70% to the portion of daily net assets in excess of $1
billion.

Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund
pays an administration fee, accrued daily and payable monthly, by applying the
annual rate of 0.08% to the Fund's daily net assets.

3. Plan of Distribution

Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Adviser and Administrator. The
Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Act. The Plan provides that the Fund will pay the Distributor a fee
which is accrued daily and paid monthly at the following annual rates: (i) Class
A -- up to 0.25% of the average daily net assets of Class A; (ii) Class B -- up
to 1.0% of the average daily net assets of Class B; and (iii) Class C -- up to
1.0% of the average daily net assets of Class C.

In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to treat such expenses.
The Distributor has advised the Fund that such excess amounts totaled $5,204,707
at May 31, 2005.

In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the six months ended May 31, 2005, the distribution fee was accrued for
Class A shares and Class C shares at the annual rate of 0.23% and 0.93%,
respectively.

Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2005 (UNAUDITED) continued

The Distributor has informed the Fund that for the six months ended May 31,
2005, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $107,007 and $2,600,
respectively and received $27,912 in front-end sales charges from sales of the
Fund's Class A shares. The respective shareholders pay such charges which are
not an expense of the Fund.

4. Security Transactions and Transactions with Affiliates

The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended May 31, 2005 aggregated
$23,420,864 and $42,700,979, respectively.

For the six months ended May 31, 2005, the Fund incurred brokerage commissions
of $1,224 with Morgan Stanley & Co., Inc., an affiliate of the Investment
Adviser, Administrator and Distributor, for portfolio transactions executed on
behalf of the fund.

Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and
Distributor, is the Fund's transfer agent.

The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he receives for serving on the Board of Trustees. Each eligible Trustee
generally may elect to have the deferred amounts credited with a return equal to
the total return on one or more of the Morgan Stanley funds that are offered as
investment options under the Compensation Plan. Appreciation/depreciation and
distributions received from these investments are recorded with an offsetting
increase/decrease in the deferred compensation obligation and do not affect the
net asset value of the Fund.

Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2005 (UNAUDITED) continued

5. Shares of Beneficial Interest

Transactions in shares of beneficial interest were as follows:

<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, 2005 NOVEMBER 30, 2004
------------------------- -------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------

CLASS A SHARES
Sold................................................. 158,572 $ 2,671,210 368,160 $ 5,452,520
Conversion from Class B.............................. 561,841 9,289,811 -- --
Reinvestment of dividends and distributions.......... 43,422 739,729 19,518 280,997
Redeemed............................................. (248,817) (4,143,160) (289,261) (4,229,999)
---------- ------------ ---------- ------------
Net increase - Class A............................... 515,018 8,557,590 98,417 1,503,518
---------- ------------ ---------- ------------
CLASS B SHARES
Sold................................................. 429,402 7,247,197 1,191,679 17,949,122
Conversion to Class A................................ (563,893) (9,289,811) -- --
Reinvestment of dividends and distributions.......... 399,907 6,805,600 196,997 2,806,099
Redeemed............................................. (1,272,568) (21,269,734) (2,843,101) (41,161,407)
---------- ------------ ---------- ------------
Net decrease - Class B............................... (1,007,152) (16,506,748) (1,454,425) (20,406,186)
---------- ------------ ---------- ------------
CLASS C SHARES
Sold................................................. 91,624 1,552,779 254,222 3,761,809
Reinvestment of dividends and distributions.......... 56,969 969,206 25,669 366,935
Redeemed............................................. (202,359) (3,382,980) (316,260) (4,612,766)
---------- ------------ ---------- ------------
Net decrease - Class C............................... (53,766) (860,995) (36,369) (484,022)
---------- ------------ ---------- ------------
CLASS D SHARES
Sold................................................. 214,940 3,617,805 777,867 11,556,107
Reinvestment of dividends and distributions.......... 266,224 4,536,600 154,916 2,230,010
Redeemed............................................. (616,426) (10,365,355) (1,183,528) (17,599,006)
---------- ------------ ---------- ------------
Net decrease - Class D............................... (135,262) (2,210,950) (250,745) (3,812,889)
---------- ------------ ---------- ------------
Net decrease in Fund................................. (681,162) $(11,021,103) (1,643,122) $(23,199,579)
========== ============ ========== ============
</Table>

Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2005 (UNAUDITED) continued

6. Federal Income Tax Status

The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.

As of November 30, 2005, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales.

7. Legal Matters

The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a consolidated class action. This consolidated action also names
as defendants certain individual Trustees and Directors of the Morgan Stanley
funds. The consolidated amended complaint generally alleges that defendants,
including the Fund, violated their statutory disclosure obligations and
fiduciary duties by failing properly to disclose (i) that the Investment Adviser
and certain affiliates of the Investment Adviser allegedly offered economic
incentives to brokers and others to recommend the funds advised by the
Investment Adviser or its affiliates to investors rather than funds managed by
other companies, and (ii) that the funds advised by the Investment Adviser or
its affiliates, including the Fund, allegedly paid excessive commissions to
brokers in return for their efforts to recommend these funds to investors. The
complaint seeks, among other things, unspecified compensatory damages,
rescissionary damages, fees and costs. The defendants have moved to dismiss the
action and intend to otherwise vigorously defend it. On March 10, 2005,
Plaintiffs sought leave to supplement their complaint to assert claims on behalf
of other investors. While the Fund and Adviser believe that each has meritorious
defenses, the ultimate outcome of this matter is not presently determinable at
this early stage of the litigation, and no provision has been made in the Fund's
financial statements for the effect, if any, of this matter.

Morgan Stanley Real Estate Fund
FINANCIAL HIGHLIGHTS

Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:

<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30,
MONTHS ENDED --------------------------------------------------------
MAY 31, 2005 2004 2003 2002 2001 2000
------------ -------- --------- --------- --------- ---------
(unaudited)

Class A Shares
Selected Per Share Data:

Net asset value, beginning of period.......... $17.47 $13.58 $ 10.59 $ 11.39 $ 10.51 $ 8.63
------ ------ ------- ------- ------- -------

Income (loss) from investment operations:
Net investment income++................... 0.23 0.17 0.32 0.29 0.35 0.31
Net realized and unrealized gain (loss)... 1.16 4.29 3.20 (0.17) 0.93 2.00
------ ------ ------- ------- ------- -------

Total income from investment operations....... 1.39 4.46 3.52 0.12 1.28 2.31
------ ------ ------- ------- ------- -------

Less dividends and distributions from:
Net investment income..................... (0.21) (0.18) (0.32) (0.28) (0.35) (0.33)
Net realized gain......................... (1.07) (0.39) (0.21) (0.64) (0.05) (0.04)
Paid-in-capital........................... -- -- -- -- -- (0.06)
------ ------ ------- ------- ------- -------

Total dividends and distributions............. (1.28) (0.57) (0.53) (0.92) (0.40) (0.43)
------ ------ ------- ------- ------- -------

Net asset value, end of period................ $17.58 $17.47 $ 13.58 $ 10.59 $ 11.39 $ 10.51
====== ====== ======= ======= ======= =======

Total Return+................................. 8.24%(1) 33.84% 34.61% 0.88% 12.38% 27.46%

Ratios to Average Net Assets(3):
Expenses...................................... 1.46%(2) 1.62% 1.62% 1.63% 1.54% 1.71%
Net investment income......................... 2.83%(2) 1.21% 2.77% 2.52% 3.19% 3.20%

Supplemental Data:
Net assets, end of period, in thousands....... $20,333 $11,210 $7,378 $6,401 $7,860 $9,943
Portfolio turnover rate....................... 12%(1) 14% 23% 28% 40% 57%
</Table>

- ---------------------

<Table>

++ The per share amounts were computed using an average number
of shares outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated
based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>

See Notes to Financial Statements
23

Morgan Stanley Real Estate Fund
FINANCIAL HIGHLIGHTS continued

<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30,
MONTHS ENDED ------------------------------------------------------
MAY 31, 2005 2004 2003 2002 2001 2000
------------ --------- --------- -------- -------- --------
(unaudited)

Class B Shares
Selected Per Share Data:

Net asset value, beginning of period.......... $17.40 $13.53 $10.55 $11.36 $10.49 $ 8.62
------ ------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment income++................... 0.17 0.07 0.24 0.20 0.27 0.24
Net realized and unrealized gain (loss)... 1.14 4.26 3.19 (0.17) 0.92 1.99
------ ------ ------ ------ ------ ------

Total income from investment operations....... 1.31 4.33 3.43 0.03 1.19 2.23
------ ------ ------ ------ ------ ------

Less dividends and distributions from:
Net investment income..................... (0.14) (0.07) (0.24) (0.20) (0.27) (0.27)
Net realized gain......................... (1.07) (0.39) (0.21) (0.64) (0.05) (0.04)
Paid-in-capital........................... -- -- -- -- -- (0.05)
------ ------ ------ ------ ------ ------

Total dividends and distributions............. (1.21) (0.46) (0.45) (0.84) (0.32) (0.36)
------ ------ ------ ------ ------ ------

Net asset value, end of period................ $17.50 $17.40 $13.53 $10.55 $11.36 $10.49
====== ====== ====== ====== ====== ======

Total Return+................................. 7.79%(1) 32.81% 33.64% 0.15% 11.41% 26.41%

Ratios to Average Net Assets(3):
Expenses...................................... 2.23%(2) 2.38% 2.37% 2.38% 2.36% 2.46%
Net investment income......................... 2.06%(2) 0.45% 2.02% 1.77% 2.37% 2.45%

Supplemental Data:
Net assets, end of period, in thousands....... $97,555 $114,483 $108,680 $95,343 $86,479 $75,101
Portfolio turnover rate....................... 12%(1) 14% 23% 28% 40% 57%
</Table>

- ---------------------

<Table>

See Notes to Financial Statements
24

Morgan Stanley Real Estate Fund
FINANCIAL HIGHLIGHTS continued

<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30,
MONTHS ENDED --------------------------------------------------------
MAY 31, 2005 2004 2003 2002 2001 2000
------------ --------- --------- -------- --------- ---------
(unaudited)

Class C Shares
Selected Per Share Data:

Net asset value, beginning of period.......... $17.40 $ 13.53 $ 10.55 $11.36 $ 10.50 $ 8.62
------ ------- ------- ------ ------- -------

Income (loss) from investment operations:
Net investment income++................... 0.18 0.06 0.23 0.20 0.27 0.26
Net realized and unrealized gain (loss)... 1.15 4.27 3.20 (0.17) 0.91 1.98
------ ------- ------- ------ ------- -------

Total income from investment operations....... 1.33 4.33 3.43 0.03 1.18 2.24
------ ------- ------- ------ ------- -------

Less dividends and distributions from:
Net investment income..................... (0.15) (0.07) (0.24) (0.20) (0.27) (0.27)
Net realized gain......................... (1.07) (0.39) (0.21) (0.64) (0.05) (0.04)
Paid-in-capital........................... -- -- -- -- -- (0.05)
------ ------- ------- ------ ------- -------

Total dividends and distributions............. (1.22) (0.46) (0.45) (0.84) (0.32) (0.36)
------ ------- ------- ------ ------- -------

Net asset value, end of period................ $17.51 $ 17.40 $ 13.53 $10.55 $ 11.36 $ 10.50
====== ======= ======= ====== ======= =======

Total Return+................................. 7.89%(1) 32.83% 33.54% 0.15% 11.39% 26.50%

Ratios to Average Net Assets(3):
Expenses...................................... 2.16%(2) 2.38% 2.37% 2.38% 2.36% 2.46%
Net investment income......................... 2.13%(2) 0.45% 2.02% 1.77% 2.37% 2.45%

Supplemental Data:
Net assets, end of period, in thousands....... $14,413 $15,261 $12,359 $9,129 $7,504 $6,759
Portfolio turnover rate....................... 12%(1) 14% 23% 28% 40% 57%
</Table>

- ---------------------

<Table>

See Notes to Financial Statements
25

Morgan Stanley Real Estate Fund
FINANCIAL HIGHLIGHTS continued

<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30,
MONTHS ENDED --------------------------------------------------------
MAY 31, 2005 2004 2003 2002 2001 2000
------------ --------- --------- -------- --------- ---------
(unaudited)

Class D Shares
Selected Per Share Data:

Net asset value, beginning of period.......... $17.48 $ 13.59 $ 10.59 $11.40 $ 10.53 $ 8.64
------ ------- ------- ------ ------- -------

Income (loss) from investment operations:
Net investment income++................... 0.26 0.21 0.34 0.30 0.37 0.27
Net realized and unrealized gain (loss)... 1.15 4.28 3.22 (0.16) 0.93 2.08
------ ------- ------- ------ ------- -------

Total income from investment operations....... 1.41 4.49 3.56 0.14 1.30 2.35
------ ------- ------- ------ ------- -------

Less dividends and distributions from:
Net investment income..................... (0.23) (0.21) (0.35) (0.31) (0.38) (0.36)
Net realized gain......................... (1.07) (0.39) (0.21) (0.64) (0.05) (0.04)
Paid-in-capital........................... -- -- -- -- -- (0.06)
------ ------- ------- ------ ------- -------

Total dividends and distributions............. (1.30) (0.60) (0.56) (0.95) (0.43) (0.46)
------ ------- ------- ------ ------- -------

Net asset value, end of period................ $17.59 $ 17.48 $ 13.59 $10.59 $ 11.40 $ 10.53
====== ======= ======= ====== ======= =======

Total Return+................................. 8.35%(1) 34.13% 34.92% 1.14% 12.58% 27.88%

Ratios to Average Net Assets(3):
Expenses...................................... 1.23%(2) 1.38% 1.37% 1.38% 1.36% 1.46%
Net investment income......................... 3.06%(2) 1.45% 3.02% 2.77% 3.37% 3.45%

Supplemental Data:
Net assets, end of period, in thousands....... $69,507 $71,433 $58,930 $33,652 $14,349 $5,193
Portfolio turnover rate....................... 12%(1) 14% 23% 28% 40% 57%
</Table>

- ---------------------

<Table>

++ The per share amounts were computed using an average number
of shares outstanding during the period.
+ Calculated based on the net asset value as of the last
business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>

See Notes to Financial Statements
26

(This Page Intentionally Left Blank)

TRUSTEES

Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid

OFFICERS

Charles A. Fiumefreddo
Chairman of the Board

Mitchell M. Merin
President

Ronald E. Robison
Executive Vice President and Principal Executive Officer

Joseph J. McAlinden
Vice President

Barry Fink
Vice President

Amy R. Doberman
Vice President

Carsten Otto
Chief Compliance Officer

Stefanie V. Chang
Vice President

Francis J. Smith
Treasurer and Chief Financial Officer

Thomas F. Caloia
Vice President

Mary E. Mullin
Secretary

TRANSFER AGENT

Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281

INVESTMENT ADVISER

Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020

The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.

This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its directors. It is available, without charge, by calling (800) 869-NEWS.

This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.

Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.

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MORGAN STANLEY FUNDS

Morgan Stanley
Real Estate Fund
Semiannual Report
May 31, 2005

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36068RPT-RA05-00578P-Y05/05

Item 1 - Report to Shareholders

Item 2. Code of Ethics.