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, 2006

Date of reporting period: May 31, 2006

Item 1 - Report to Shareholders

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 months ended May 31, 2006

TOTAL RETURN FOR THE 6 MONTHS ENDED MAY 31, 2006

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

9.40% 8.91% 9.02% 9.52% 7.12% 7.60%
</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

The six-month review period was very positive for both direct real estate assets
and the public real estate securities market. Real estate investment trusts
("REITs") rallied strongly in the first quarter of 2006. This robust first
quarter performance was attributable to the following factors: evidence of
continued improvements in underlying real estate values in the private real
estate market; the stronger outlook for the recovery of property fundamentals,
which was supported by favorable fourth quarter earnings results; continued
private takeover transaction of public real estate companies and speculation;
and the addition of two REITs to the S&P 500(R) Index. REITs declined in April
and May, but this appeared to represent a pullback from the very strong
performance of early 2006.

Among the major U.S. REIT sectors, the apartment and office stocks outperformed
the FTSE NAREIT Equity Index's overall return, while the retail stocks
underperformed during the six-month period. Apartment stocks advanced on strong
reported fourth quarter earnings and their favorable forward outlook for 2006.
The sector also benefited from upgraded views on underlying asset values due to
transactional evidence, including takeover activity in the sector. The office
sector posted strong returns against a backdrop of sustained strength in private
market values, as evidenced by both individual transactions and ongoing takeover
activity. Office REITs were also bolstered by investor optimism for a recovery
in this sector; however, the recovery has been uneven across geographic markets
as well as asset quality. In the retail sector, fundamentals continue to remain
strong but face declining sentiment as investors assess the impact of higher
interest rates and energy costs on consumer spending. The mall REIT sub-sector
was a particular underperformer during the period due to company-specific issues
at two of the larger mall owners. Among the smaller REIT sectors, the health
care and storage sectors underperformed, and the hotel sector outperformed.

PERFORMANCE ANALYSIS

Morgan Stanley Real Estate Fund outperformed the FTSE NAREIT Equity Index
(formerly NAREIT Equity Index) and the Lipper Real Estate Funds Index for the
six months ended May 31, 2006, assuming no deduction of applicable sales
charges.

Relative to the FTSE NAREIT Equity Index, the Fund's stock selection was
particularly favorable in the mall and hotel sectors. Within the mall sector,
the Fund benefited from its relative overweight to high quality mall owners in
dominant trades areas and from its significant relative underweight to two weak
performing mall REITs with company-specific issues. In the hotel sector, a
significant portfolio weighting to the larger hotel operating companies, which
are significant owners of upscale urban assets, proved advantageous.

From a top-down perspective, the Fund's relative results benefited from
overweights to the apartment and hotel sectors and from an underweight to the
mixed office/industrial sector. These positive influences were modestly offset
by an overweight to the mall sector, which was hampered by diminishing
expectations for consumer spending amid higher interest rates and rising energy
costs.

There is no guarantee that any sectors mentioned will continue to perform as
discussed herein or that securities in such sectors will be held by the Fund in
the future.

<Table>
<Caption>
TOP 10 HOLDINGS

Simon Property Group, Inc. 9.7%
Boston Properties, Inc. 6.5
AvalonBay Communities, Inc. 6.4
Host Hotels & Resorts Inc. 5.8
Archstone-Smith Trust 5.1
Brookfield Properties Corp. (Canada) 4.8
Starwood Hotels & Resorts Worldwide, Inc. 4.8
Equity Residential 4.0
Regency Centers Corp. 3.9
Federal Realty Investment Trust 3.8
</Table>

<Table>
<Caption>
PORTFOLIO COMPOSITION

Common Stocks 98.5%
Short-Term Paper 1.2
</Table>

Data as of May 31, 2006. 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. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE
FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM
N-CSRS AND FORM N-CSR, RESPECTIVELY. 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 POLICY AND PROCEDURES AND PROXY VOTING RECORD

YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT
CHARGE, UPON REQUEST, BY CALLING TOLL FREE (800) 869-NEWS OR BY VISITING THE
MUTUAL FUND CENTER ON OUR WEB SITE AT WWW.MORGANSTANLEY.COM. IT IS ALSO
AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT
HTTP://WWW.SEC.GOV.

YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO
PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30
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, 2006

<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 24.43%(3) 23.46%(3) 23.52%(3) 24.83%(3)
17.90(4) 18.86(4) 22.60(4) --
5 YEARS 20.43(3) 19.50(3) 19.52(3) 20.71(3)
19.13(4) 19.30(4) 19.52(4) --
SINCE INCEPTION 17.24(3) 16.33(3) 16.35(3) 17.55(3)
16.36(4) 16.33(4) 16.35(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 most recent month-end performance figures, please visit
www.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 1.0% for shares
redeemed within one year of purchase.

++ Class D has no sales charge.

(1) The FTSE NAREIT Equity Index (formerly 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 advisory 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 12/01/05 - 05/31/06.

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 *
------------- ------------- ---------------
12/01/05 -
12/01/05 05/31/06 05/31/06
------------- ------------- ---------------

CLASS A
Actual (9.40% return)....................................... $1,000.00 $1,094.00 $ 7.52
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,017.75 $ 7.24
CLASS B
Actual (8.91% return)....................................... $1,000.00 $1,089.10 $11.46
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,013.96 $11.05
CLASS C
Actual (9.02% return)....................................... $1,000.00 $1,090.20 $11.20
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,014.21 $10.80
CLASS D
Actual (9.52% return)....................................... $1,000.00 $1,095.20 $ 6.27
Hypothetical (5% annual return before expenses)............. $1,000.00 $1,018.95 $ 6.04
</Table>

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

* Expenses are equal to the Fund's annualized expense ratio of 1.44%, 2.20%,
2.15% and 1.20% for Class A, Class B, Class C and Class D shares,
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 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 at the Investment Adviser's
expense. (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

On a regular basis, the Board reviews the performance of all funds in the Morgan
Stanley Fund Complex, including the Fund, compared to their peers, paying
specific attention to the underperforming funds. In addition, the Board
specifically reviewed the Fund's performance for the one-, three- and five-year
periods ended November 30, 2005, as shown in a report provided by Lipper (the
"Lipper Report"), compared to the performance of comparable funds selected by
Lipper (the "performance peer group"). The Board also discussed with the Adviser
the performance goals and the actual results achieved in managing the Fund. The
Board concluded that the Fund's performance was competitive with that of its
performance peer group.

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

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

FEES AND EXPENSES RELATIVE TO COMPARABLE FUNDS MANAGED BY OTHER ADVISERS

The Board reviewed the management fee rate and total expense ratio of the Fund
as compared to the average management fee rate and average total expense ratio
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. The Board concluded that the Fund's management fee rate and
total expense ratio were competitive with those of its expense peer group.

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 THE ADVISER AND AFFILIATES

The Board considered information concerning the costs incurred and profits
realized by the Adviser and affiliates during the last year from their
relationship with the Fund and during the last two years from their relationship
with the Morgan Stanley Fund Complex and reviewed with the Adviser the cost
allocation methodology used to determine the profitability of the Adviser and
affiliates. Based on its review of the information it received, the Board
concluded that the profits earned by the Adviser and 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
affiliates from their relationship with the Fund and the Morgan Stanley Fund
Complex, such as sales charges on sales of Class A shares and "float" benefits
derived from handling of checks for purchases and sales 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
sold a joint venture that owned an electronic trading system network ("ECN"),
which may be used by the Adviser for trading on behalf of the Fund. As part of
the sale of the joint venture, the affiliate receives a 10-year payout based on
the revenue stream from trading on the ECN. Although the affiliate disgorges the
portion of the payout that is comprised of commissions received from trades
executed by the Adviser on the ECN to a charitable organization, the Board
considered the fact that trades by the Adviser would increase order flow, and,
thus, result in a potential fall-out benefit to the affiliate. The Board
concluded that the float benefits were relatively small, the sales charges and

12b-1 fees were competitive with those of other broker-dealers, the affiliate
disgorged revenues in connection with the ECN-related revenue and the potential
fall-out benefit from increased order flow was relatively small.

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 Morgan Stanley 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
that 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, 2006 (UNAUDITED)

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

Common Stocks (98.5%)
Hotels/Resorts/
Cruiselines (9.2%)
5,491 Four Seasons Hotels, Inc.
(Canada)................ $ 339,454
167,314 Hilton Hotels Corp. ..... 4,594,442
88,380 Morgans Hotel Group
Co.*.................... 1,324,816
110,690 Starwood Hotels & Resorts
Worldwide, Inc. ........ 6,763,159
------------
13,021,871
------------
Real Estate - Industrial/
Office (4.8%)
229,362 Brookfield Properties
Corp. (Canada).......... 6,802,877
------------
Real Estate - Retail
(1.8%)
58,060 Forest City Enterprises,
Inc. (Class A).......... 2,606,894
------------
REIT - Diversified (2.0%)
30,820 Vornado Realty Trust..... 2,770,410
------------
REIT - Healthcare (3.4%)
14,550 Cogdell Spencer Inc. .... 270,194
35,990 Health Care Property
Investors, Inc. ........ 941,139
14,700 LTC Properties, Inc. .... 322,812
149,335 Senior Housing Properties
Trust................... 2,570,055
52,760 Sunrise Senior Living,
Inc. (Canada)........... 491,960
5,760 Universal Health Realty
Income Trust............ 179,539
7,585 Windrose Medical
Properties Trust........ 106,190
------------
4,881,889
------------
REIT - Industrial/ Office
(20.1%)
81,010 AMB Property Corp. ...... 4,004,324
109,275 Boston Properties,
Inc. ................... 9,250,129
44,277 Brandywine Realty
Trust................... 1,284,918
131,090 Equity Office Properties
Trust................... 4,411,179
</Table>

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

17,160 Liberty Property Trust... $ 730,673
79,012 Mack-Cali Realty
Corp. .................. 3,388,035
12,255 Parkway Properties,
Inc. ................... 482,234
34,925 ProLogis................. 1,727,041
4,880 Reckson Associates Realty
Corp. .................. 187,587
37,300 Republic Property
Trust................... 384,190
8,400 SL Green Realty Corp. ... 833,364
79,130 Trizec Properties,
Inc. ................... 1,866,677
------------
28,550,351
------------
REIT - Lodging/ Resorts
(6.6%)
8,662 Hersha Hospitality
Trust................... 80,903
409,884 Host Hotels & Resorts
Inc. ................... 8,226,372
148,630 Legacy Hotels REIT
(Canada)................ 1,086,319
------------
9,393,594
------------
REIT - Residential
(21.9%)
15,735 American Campus
Communities, Inc. ...... 375,437
148,772 Archstone-Smith Trust.... 7,193,126
85,175 AvalonBay Communities,
Inc. ................... 9,054,102
6,010 BRE Properties, Inc.
(Class A)............... 313,361
38,711 Equity Lifestyle
Properties, Inc. ....... 1,670,380
134,753 Equity Residential....... 5,942,607
46,510 Essex Property Trust,
Inc. ................... 4,953,315
34,415 Post Properties, Inc. ... 1,472,962
6,090 United Dominion Realty
Trust, Inc. ............ 164,491
------------
31,139,781
------------
REIT - Retail (23.0%)
26,795 Acadia Realty Trust...... 573,145
106,300 BPP Liquidating
Trust++................. 5,315
17,700 Cedar Shopping Centers
Inc. ................... 257,358
79,740 Federal Realty Investment
Trust................... 5,452,621
</Table>

10
See Notes to Financial Statements

Morgan Stanley Real Estate Fund
PORTFOLIO OF INVESTMENTS - MAY 31, 2006 (UNAUDITED) continued

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

23,975 General Growth
Properties, Inc. ....... $ 1,049,146
58,765 Macerich Co. (The)....... 4,049,496
3,000 Pan Pacific Retail
Properties, Inc. ....... 198,810
5,300 Ramco-Gershenson
Properties Trust........ 137,800
90,590 Regency Centers Corp. ... 5,581,250
172,854 Simon Property Group,
Inc. ................... 13,764,364
43,035 Taubman Centers, Inc. ... 1,674,062
------------
32,743,367
------------
REIT - Specialty (0.6%)
21,540 Centracore Properties
Trust................... 521,699
9,860 Plum Creek Timber Co.,
Inc. ................... 352,495
------------
874,194
------------
REIT - Storage (5.1%)
61,085 Public Storage, Inc. .... 4,378,573
48,767 Shurgard Storage Centers,
Inc. (Class A).......... 2,843,604
------------
7,222,177
------------
Total Common Stocks
(Cost $75,964,781)....... 140,007,405
------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- ------------------------------------------------------

Short-Term Investment (1.2%)
Repurchase Agreement
$ 1,700 Joint repurchase
agreement account 5.02%
due 06/01/06 (dated
05/31/06; proceeds
$1,700,237) (a)
(Cost $1,700,000)....... $ 1,700,000
------------
</Table>

<Table>

Total Investments
(Cost $77,664,781) (b)...... 99.7% 141,707,405
Other Assets in Excess
Liabilities................. 0.3 400,946
----- ------------
Net Assets.................. 100.0% $142,108,351
===== ============
</Table>

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

<Table>

REIT Real Estate Investment Trust.
* Non-income producing security.
++ A security with a total market value equal to
$5,315 had been valued at its fair value as
determined in good faith under procedures
established by and under the general supervision of
the Fund's Trustees.
(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
$64,918,394 and the aggregate gross unrealized
depreciation is $875,770, resulting in net
unrealized appreciation of $64,042,624.
</Table>

11
See Notes to Financial Statements

Morgan Stanley Real Estate Fund
SUMMARY OF INVESTMENTS - MAY 31, 2006 (UNAUDITED)

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

REIT - Retail............................................... $ 32,743,367 23.0%
REIT - Residential.......................................... 31,139,781 21.9
REIT - Industrial/Office.................................... 28,550,351 20.1
Hotels/Resorts/Cruiselines.................................. 13,021,871 9.2
REIT - Lodging/Resorts...................................... 9,393,594 6.6
REIT - Storage.............................................. 7,222,177 5.1
Real Estate - Industrial/Office............................. 6,802,877 4.8
REIT - Healthcare........................................... 4,881,889 3.4
REIT - Diversified.......................................... 2,770,410 2.0
Real Estate - Retail........................................ 2,606,894 1.8
Repurchase Agreement........................................ 1,700,000 1.2
REIT - Specialty............................................ 874,194 0.6
------------ ----
$141,707,405 99.7%
============ ====
</Table>

12
See Notes to Financial Statements

Morgan Stanley Real Estate Fund
FINANCIAL STATEMENTS

Statement of Assets and Liabilities
May 31, 2006 (unaudited)

<Table>

Assets:
Investments in securities, at value
(cost $77,664,781)........................................ $141,707,405
Receivable for:
Investments sold........................................ 570,448
Dividends............................................... 168,547
Shares of beneficial interest sold...................... 89,273
Interest................................................ 237
Prepaid expenses and other assets........................... 71,934
------------
Total Assets............................................ 142,607,844
------------
Liabilities:
Payable for:
Shares of beneficial interest redeemed.................. 185,851
Investment advisory fee................................. 105,063
Distribution fee........................................ 99,402
Transfer agent fee...................................... 16,914
Administration fee...................................... 10,506
Accrued expenses and other payables......................... 81,757
------------
Total Liabilities....................................... 499,493
------------
Net Assets.............................................. $142,108,351
============
Composition of Net Assets:
Paid-in-capital............................................. $63,091,300
Net unrealized appreciation................................. 64,044,529
Accumulated undistributed net investment income............. 69,434
Accumulated undistributed net realized gain................. 14,903,088
------------
Net Assets.............................................. $142,108,351
============
Class A Shares:
Net Assets.................................................. $26,266,969
Shares Outstanding (unlimited authorized, $.01 par value)... 1,624,918
Net Asset Value Per Share............................... $16.17
============
Maximum Offering Price Per Share,
(net asset value plus 5.54% of net asset value)......... $17.07
============
Class B Shares:
Net Assets.................................................. $85,171,308
Shares Outstanding (unlimited authorized, $.01 par value)... 5,295,451
Net Asset Value Per Share............................... $16.08
============
Class C Shares:
Net Assets.................................................. $15,497,282
Shares Outstanding (unlimited authorized, $.01 par value)... 963,383
Net Asset Value Per Share............................... $16.09
============
Class D Shares:
Net Assets.................................................. $15,172,792
Shares Outstanding (unlimited authorized, $.01 par value)... 936,855
Net Asset Value Per Share............................... $16.20
============
</Table>

13
See Notes to Financial Statements

Morgan Stanley Real Estate Fund
FINANCIAL STATEMENTS continued

Statement of Operations
For the six months ended May 31, 2006 (unaudited)

<Table>

Net Investment Income:
Income
Dividends (net of $16,505 foreign withholding tax).......... $ 2,534,211
Interest.................................................... 53,009
-----------
Total Income............................................ 2,587,220
-----------
Expenses
Investment advisory fee..................................... 591,193
Distribution fee (Class A shares)........................... 29,892
Distribution fee (Class B shares)........................... 458,081
Distribution fee (Class C shares)........................... 73,960
Transfer agent fees and expenses............................ 146,058
Administration fee.......................................... 59,119
Professional fees........................................... 35,036
Shareholder reports and notices............................. 30,088
Custodian fees.............................................. 13,972
Registration fees........................................... 8,973
Trustees' fees and expenses................................. 970
Other....................................................... 5,060
-----------
Total Expenses.......................................... 1,452,402

Less: expense offset........................................ (653)
-----------
Net Expenses............................................ 1,451,749
-----------
Net Investment Income................................... 1,135,471
-----------
Net Realized and Unrealized Gain (Loss):
Net Realized Gain on:
Investments................................................. 13,400,901
Foreign exchange transactions............................... 3,513
-----------
Net Realized Gain....................................... 13,404,414
-----------
Net Change in Unrealized Appreciation/Depreciation on:
Investments................................................. (1,759,902)
Translation of other assets and liabilities denominated in
foreign currencies........................................ (2,128)
-----------
Net Depreciation........................................ (1,762,030)
-----------
Net Gain................................................ 11,642,384
-----------
Net Increase................................................ $12,777,855
===========
</Table>

14
See Notes to Financial Statements

Morgan Stanley Real Estate Fund
FINANCIAL STATEMENTS continued

Statements of Changes in Net Assets

<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
MAY 31, 2006 NOVEMBER 30, 2005
------------ -----------------
(unaudited)

Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 1,135,471 $ 1,380,808
Net realized gain........................................... 13,404,414 49,127,660
Net change in unrealized appreciation/depreciation.......... (1,762,030) (9,760,418)
------------ ------------
Net Increase............................................ 12,777,855 40,748,050
------------ ------------
Dividends and Distributions to Shareholders from:
Net investment income
Class A shares.......................................... (222,921) (181,905)
Class B shares.......................................... (503,947) (328,887)
Class C shares.......................................... (88,563) (53,654)
Class D shares.......................................... (165,574) (918,009)
Net realized gain
Class A shares.......................................... (5,611,512) (937,896)
Class B shares.......................................... (22,845,631) (8,590,969)
Class C shares.......................................... (3,696,876) (1,164,677)
Class D shares.......................................... (3,845,984) (5,416,036)
------------ ------------
Total Dividends and Distributions....................... (36,981,008) (17,592,033)
------------ ------------

Net increase (decrease) from transactions in shares of
beneficial interest....................................... 16,054,206 (85,285,545)
------------ ------------
Net Decrease............................................ (8,148,947) (62,129,528)
Net Assets:
Beginning of period......................................... 150,257,298 212,386,826
------------ ------------
End of Period
(Including accumulated undistributed net investment income
of $69,434 and dividends in excess of net investment income
of $85,032, respectively)................................... $142,108,351 $150,257,298
============ ============
</Table>

15
See Notes to Financial Statements

Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2006 (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 Fund will assess a 2% redemption fee on Class A shares, Class B shares,
Class C shares, and Class D shares, which is paid directly to the Fund, for
shares redeemed within thirty days of purchase, subject to certain exceptions.
The redemption fee is designed to protect the Fund and its remaining
shareholders from the effects of short-term trading.

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

Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2006 (UNAUDITED) continued

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 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 real
estate investment trust ("REIT") may be redesignated as a reduction of the cost
of the related investment 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. Foreign Currency Translation and Forward Foreign Currency Contracts -- The
books and records of the Fund are maintained in U.S. dollars as follows: (1) the
foreign currency market value of investment securities, other assets and
liabilities and forward foreign currency contracts ("forward contracts") are
translated at the exchange rates prevailing at the end of the period; and

Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2006 (UNAUDITED) continued

(2) purchases, sales, income and expenses are translated at the exchange rates
prevailing on the respective dates of such transactions. The resultant exchange
gains and losses are recorded as realized and unrealized gain/loss on foreign
exchange transactions. Pursuant to U.S. federal income tax regulations, certain
foreign exchange gains/losses included in realized and unrealized gain/loss are
included in or are a reduction of ordinary income for federal income tax
purposes. The Fund does not isolate that portion of the results of operations
arising as a result of changes in the foreign exchange rates from the changes in
the market prices of securities held. Forward contracts are valued daily at the
appropriate exchange rates. The resultant unrealized exchange gains and losses
are recorded as unrealized foreign currency gain or loss. The Fund records
realized gains or losses on delivery of the currency or at the time the forward
contract is extinguished (compensated) by entering into a closing transaction
prior to delivery.

F. 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.

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

H. 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.

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 the daily net assets not exceeding $500
million; 0.75% to the portion of the daily net assets exceeding $500 million but
not exceeding $1 billion and 0.70% to the portion of the 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.

Effective November 18, 2005, the Investment Adviser has agreed to cap the Fund's
operating expenses (except for brokerage and 12b-1 fees) for one year by
assuming the Fund's "other expenses" and/or waiving the Fund's advisory fees,
and the Administrator has agreed to waive the

Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2006 (UNAUDITED) continued

Fund's administrative fees, to the extent such operating expenses on an
annualized basis exceed 1.26% of the average daily net assets of the Fund.

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 $4,444,618
at May 31, 2006.

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, 2006, the distribution fee was accrued for
Class A shares and Class C shares at the annual rate of 0.24% and 0.95%,
respectively.

The Distributor has informed the Fund that for the six months ended May 31,
2006, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B shares and Class C shares of $72, $75,390 and
$498, respectively and received $33,634 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.

Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2006 (UNAUDITED) continued

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, 2006 aggregated
$16,698,575 and $36,321,172, respectively.

For the six months ended May 31, 2006, the Fund incurred brokerage commissions
of $1,313 with Morgan Stanley & Co., Inc., an affiliate of the Investment
Adviser, Administrator and Distributor, for portfolio transactions executed on
behalf of the Fund.

At May 31, 2006, Morgan Stanley Multi-Asset Class Fund, an affiliate of the
Investment Adviser, Administrator and Distributor, owned 118,200 Class D shares
of beneficial interest 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.

5. Expense Offset

The expense offset represents a reduction of the transfer agent fees and
expenses for earnings on cash balances maintained by the Fund.

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.

Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2006 (UNAUDITED) continued

7. 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, 2006 NOVEMBER 30, 2005
------------------------ -------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
--------- ------------ ---------- ------------

CLASS A SHARES
Sold.............................................. 242,831 $ 3,988,472 348,655 $ 6,249,309
Conversion from Class B........................... 138,838 2,250,947 627,848 10,536,868
Reinvestment of dividends and distributions....... 361,997 5,407,237 58,038 1,008,323
Redeemed.......................................... (316,436) (5,279,630) (478,579) (8,430,720)
--------- ------------ ---------- ------------
Net increase - Class A............................ 427,230 6,367,026 555,962 9,363,780
--------- ------------ ---------- ------------
CLASS B SHARES
Sold.............................................. 219,251 3,600,642 653,908 11,459,961
Conversion to Class A............................. (139,442) (2,250,947) (630,122) (10,536,868)
Reinvestment of dividends and distributions....... 1,368,442 20,351,015 444,566 7,623,651
Redeemed.......................................... (998,771) (16,371,891) (2,203,171) (38,678,267)
--------- ------------ ---------- ------------
Net increase (decrease) - Class B................. 449,480 5,328,819 (1,734,819) (30,131,523)
--------- ------------ ---------- ------------
CLASS C SHARES
Sold.............................................. 92,380 1,489,218 178,578 3,188,449
Reinvestment of dividends and distributions....... 232,255 3,454,783 64,322 1,103,967
Redeemed.......................................... (146,929) (2,422,604) (334,237) (5,845,680)
--------- ------------ ---------- ------------
Net increase (decrease) - Class C................. 177,706 2,521,397 (91,337) (1,553,264)
--------- ------------ ---------- ------------
CLASS D SHARES
Sold.............................................. 161,451 2,684,152 283,870 4,911,964
Reinvestment of dividends and distributions....... 191,435 2,863,668 315,345 5,439,719
Redeemed.......................................... (226,877) (3,710,856) (3,874,438) (73,316,221)
--------- ------------ ---------- ------------
Net increase (decrease) - Class D................. 126,009 1,836,964 (3,275,223) (62,964,538)
--------- ------------ ---------- ------------
Net increase (decrease) in Fund................... 1,180,425 $ 16,054,206 (4,545,417) $(85,285,545)
========= ============ ========== ============
</Table>

8. 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, filed in the United States District
Court Southern District of New York on April 16, 2004, generally alleges that
defendants, including the Fund, violated their statutory disclosure obligations
and fiduciary duties by failing properly to disclose (i) that the Investment

Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2006 (UNAUDITED) continued

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. On March 9, 2005, Plaintiffs sought leave to supplement their complaint
to assert claims on behalf of other investors, which motion defendants opposed.
On April 14, 2006, the Court granted defendants' motion to dismiss in its
entirety. Additionally, the Court denied Plaintiff's motion to supplement their
complaint. This matter is now concluded.

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, 2006 2005 2004 2003 2002 2001
------------ -------- -------- -------- -------- --------
(unaudited)

Class A Shares
Selected Per Share Data:

Net asset value, beginning of period................ $19.72 $17.47 $13.58 $10.59 $11.39 $10.51
------ ------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment income++......................... 0.17 0.19 0.17 0.32 0.29 0.35
Net realized and unrealized gain (loss)......... 1.25 3.60 4.29 3.20 (0.17) 0.93
------ ------ ------ ------ ------ ------

Total income from investment operations............. 1.42 3.79 4.46 3.52 0.12 1.28
------ ------ ------ ------ ------ ------

Less dividends and distributions from:
Net investment income........................... (0.17) (0.20) (0.18) (0.32) (0.28) (0.35)
Net realized gain............................... (4.80) (1.34) (0.39) (0.21) (0.64) (0.05)
------ ------ ------ ------ ------ ------

Total dividends and distributions................... (4.97) (1.54) (0.57) (0.53) (0.92) (0.40)
------ ------ ------ ------ ------ ------

Net asset value, end of period...................... $16.17 $19.72 $17.47 $13.58 $10.59 $11.39
====== ====== ====== ====== ====== ======

Total Return+....................................... 9.40%(1) 23.11% 33.84% 34.61% 0.88% 12.38%

Ratios to Average Net Assets(3):
Expenses............................................ 1.44%(2) 1.50% 1.62% 1.62% 1.63% 1.54%

Net investment income............................... 2.06%(2) 1.04% 1.21% 2.77% 2.52% 3.19%

Supplemental Data:
Net assets, end of period, in thousands............. $26,267 $23,622 $11,210 $7,378 $6,401 $7,860

Portfolio turnover rate............................. 11%(1) 21% 14% 23% 28% 40%
</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>

23
See Notes to Financial Statements

Morgan Stanley Real Estate Fund
FINANCIAL HIGHLIGHTS continued

<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30,
MONTHS ENDED ---------------------------------------------------------
MAY 31, 2006 2005 2004 2003 2002 2001
------------ --------- --------- --------- --------- ---------
(unaudited)

Class B Shares
Selected Per Share Data:

Net asset value, beginning of period....... $19.64 $17.40 $13.53 $10.55 $11.36 $10.49
------ ------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment income++................ 0.11 0.05 0.07 0.24 0.20 0.27
Net realized and unrealized gain
(loss)................................. 1.23 3.59 4.26 3.19 (0.17) 0.92
------ ------ ------ ------ ------ ------

Total income from investment operations.... 1.34 3.64 4.33 3.43 0.03 1.19
------ ------ ------ ------ ------ ------

Less dividends and distributions from:
Net investment income.................. (0.10) (0.06) (0.07) (0.24) (0.20) (0.27)
Net realized gain...................... (4.80) (1.34) (0.39) (0.21) (0.64) (0.05)
------ ------ ------ ------ ------ ------

Total dividends and distributions.......... (4.90) (1.40) (0.46) (0.45) (0.84) (0.32)
------ ------ ------ ------ ------ ------

Net asset value, end of period............. $16.08 $19.64 $17.40 $13.53 $10.55 $11.36
====== ====== ====== ====== ====== ======

Total Return+.............................. 8.91%(1) 22.18% 32.81% 33.64% 0.15% 11.41%

Ratios to Average Net Assets(3):
Expenses................................... 2.20%(2) 2.26% 2.38% 2.37% 2.38% 2.36%

Net investment income...................... 1.30%(2) 0.28% 0.45% 2.02% 1.77% 2.37%

Supplemental Data:
Net assets, end of period, in thousands.... $85,171 $95,184 $114,483 $108,680 $95,343 $86,479

Portfolio turnover rate.................... 11%(1) 21% 14% 23% 28% 40%
</Table>

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

<Table>

24
See Notes to Financial Statements

Morgan Stanley Real Estate Fund
FINANCIAL HIGHLIGHTS continued

Class C Shares
Selected Per Share Data:

Net asset value, beginning of period............... $19.64 $17.40 $13.53 $10.55 $11.36 $10.50
------ ------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment income++........................ 0.11 0.06 0.06 0.23 0.20 0.27
Net realized and unrealized gain (loss)........ 1.25 3.59 4.27 3.20 (0.17) 0.91
------ ------ ------ ------ ------ ------

Total income from investment operations............ 1.36 3.65 4.33 3.43 0.03 1.18
------ ------ ------ ------ ------ ------

Less dividends and distributions from:
Net investment income.......................... (0.11) (0.07) (0.07) (0.24) (0.20) (0.27)
Net realized gain.............................. (4.80) (1.34) (0.39) (0.21) (0.64) (0.05)
------ ------ ------ ------ ------ ------

Total dividends and distributions.................. (4.91) (1.41) (0.46) (0.45) (0.84) (0.32)
------ ------ ------ ------ ------ ------

Net asset value, end of period..................... $16.09 $19.64 $17.40 $13.53 $10.55 $11.36
====== ====== ====== ====== ====== ======

Total Return+...................................... 9.02%(1) 22.24% 32.83% 33.54% 0.15% 11.39%

Ratios to Average Net Assets(3):
Expenses........................................... 2.15%(2) 2.23% 2.38% 2.37% 2.38% 2.36%

Net investment income.............................. 1.35%(2) 0.31% 0.45% 2.02% 1.77% 2.37%

Supplemental Data:
Net assets, end of period, in thousands............ $15,497 $15,434 $15,261 $12,359 $9,129 $7,504

Portfolio turnover rate............................ 11%(1) 21% 14% 23% 28% 40%
</Table>

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

<Table>

25
See Notes to Financial Statements

Morgan Stanley Real Estate Fund
FINANCIAL HIGHLIGHTS continued

Class D Shares
Selected Per Share Data:

Net asset value, beginning of period............ $19.75 $17.48 $13.59 $10.59 $11.40 $10.53
------ ------ ------ ------ ------ ------

Income (loss) from investment operations:
Net investment income++..................... 0.19 0.23 0.21 0.34 0.30 0.37
Net realized and unrealized gain (loss)..... 1.25 3.62 4.28 3.22 (0.16) 0.93
------ ------ ------ ------ ------ ------

Total income from investment operations......... 1.44 3.85 4.49 3.56 0.14 1.30
------ ------ ------ ------ ------ ------

Less dividends and distributions from:
Net investment income....................... (0.19) (0.24) (0.21) (0.35) (0.31) (0.38)
Net realized gain........................... (4.80) (1.34) (0.39) (0.21) (0.64) (0.05)
------ ------ ------ ------ ------ ------

Total dividends and distributions............... (4.99) (1.58) (0.60) (0.56) (0.95) (0.43)
------ ------ ------ ------ ------ ------

Net asset value, end of period.................. $16.20 $19.75 $17.48 $13.59 $10.59 $11.40
====== ====== ====== ====== ====== ======

Total Return+................................... 9.52%(1) 23.50% 34.13% 34.92% 1.14% 12.58%

Ratios to Average Net Assets(3):
Expenses........................................ 1.20%(2) 1.26% 1.38% 1.37% 1.38% 1.36%

Net investment income........................... 2.30%(2) 1.28% 1.45% 3.02% 2.77% 3.37%

Supplemental Data:
Net assets, end of period, in thousands......... $15,173 $16,017 $71,433 $58,930 $33,652 $14,349

Portfolio turnover rate......................... 11%(1) 21% 14% 23% 28% 40%
</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>

26
See Notes to Financial Statements

(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

Michael E. Nugent
Chairman of the Board

Ronald E. Robison
President and Principal Executive Officer

J. David Germany
Vice President

Dennis F. Shea
Vice President

Barry Fink
Vice President

Amy R. Doberman
Vice President

Carsten Otto
Chief Compliance Officer

Stefanie V. Chang Yu
Vice President

Francis J. Smith
Treasurer and Chief Financial Officer

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 trustees. 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.

[MORGAN STANLEY LOGO]

MORGAN STANLEY FUNDS

Morgan Stanley
Real Estate Fund

Semiannual Report
May 31, 2006

[MORGAN STANLEY LOGO]

REFRPT-36068RPT-RA06-00626P-Y05/06

Item 2. Code of Ethics.

Not applicable for semiannual reports.

Item 3. Audit Committee Financial Expert.

Not applicable for semiannual reports.

Item 4. Principal Accountant Fees and Services

Not applicable for semiannual reports.

Item 5. Audit Committee of Listed Registrants.

Not applicable for semiannual reports.

Item 6.

Refer to Item 1.

Item 7. Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies.

Not applicable for semiannual reports.

Item 8. Portfolio Managers of Closed-End Management Investment
Companies

Applicable only to reports filed by closed-end funds.

Item 9. Closed-End Fund Repurchases

Applicable to reports filed by closed-end funds.

Item 10. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 11. Controls and Procedures

(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.

(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the second fiscal quarter of the period covered
by this report that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.

Item 12. Exhibits

(a) Code of Ethics -- Not applicable for semiannual reports.

(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.

Morgan Stanley Real Estate Fund

/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
July 20, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.

/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
July 20, 2006

/s/ Francis Smith
Francis Smith
Principal Financial Officer
July 20, 2006