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)
522 Fifth Avenue, New York, New York 10036
(Address of principal executive offices) (Zip code)
Ronald E. Robison
522 Fifth Avenue, New York, New York 10036
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-296-6990
Date of fiscal year end: November 30, 2008
Date of reporting period: May 31, 2008
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, 2008
TOTAL RETURN FOR THE 6 MONTHS ENDED MAY 31, 2008
<Table>
<Caption>
FTSE LIPPER
NAREIT REAL
EQUITY ESTATE
REITS S&P FUNDS
CLASS A CLASS B CLASS C CLASS I(+) INDEX(1) 500(R)(2) INDEX(3)
1.69% 1.28% 1.46% 1.84% 2.73% -4.47% 4.12%
</Table>
+ Formerly Class D shares. Renamed Class I shares effective March 31, 2008.
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 real estate investment trust (REIT) market gained 2.7 percent in the six-
month period under review, as measured by the FTSE NAREIT Equity REITs Index.
Although the results reflect a modest gain, there was tremendous volatility in
the period. Declines through February reflected concerns over the continued
deterioration of the credit markets, a weaker outlook for the economy and
heightened concerns over the prospect for even greater-than-expected declines in
asset values. The rally from March through May appeared to coincide with a rally
in the broader equity markets, and particularly financial stocks, as investors
regained confidence in the financial markets.
Among the major U.S. REIT sectors, apartment stocks significantly outperformed,
office stocks modestly outperformed and retail stocks significantly
underperformed the FTSE NAREIT Equity REITs Index. The apartment sector appeared
to benefit from continued private market transaction activity, which confirmed
that stocks in the sector were trading at significant discounts to underlying
asset values. In addition, investors became more attuned to the unique
availability of attractive financing from government agencies specifically in
this sector versus the rest of the real estate market. Finally, given the wide
disparity between public and private market valuations, the sector benefited
from plans by most of the apartment companies to continue to sell assets and buy
back stock in 2008. In the office sector, the potential for a slowdown in tenant
demand due to a weaker economy was offset by strong recoveries in share price
from a wide variety of office companies, including both owners of urban and
suburban assets, which bounced back from underperformance earlier in the period.
The retail sector significantly underperformed as investors appeared concerned
with the prospect of a slowdown in consumer spending. These concerns were
further fueled by a related pullback in retailer expansion plans, which together
with increased levels of new supply could begin to have a negative impact on
underlying real estate fundamentals and asset values for the sector. Among the
smaller sectors, the storage and health care REITs significantly outperformed
and the industrial and hotel REITs significantly underperformed the index.
PERFORMANCE ANALYSIS
All share classes of Morgan Stanley Real Estate Fund underperformed the FTSE
NAREIT Equity REITs Index and the Lipper Real Estate Funds Index, and
outperformed the S&P 500(R) for the six months ended May 31, 2008, assuming no
deduction of applicable sales charges.
Bottom-up stock selection was favorable but was offset by sector allocation
which detracted from performance for the period. Stock selection was strong in
the mall and mixed office/industrial sectors;
2
this was partially offset by stock selection in the health care sector. From a
top-down perspective, the Fund benefited from the overweight in the apartment
sector and the underweight in the industrial sector; this was offset by the
overweight in the hotel sector.
During the period, we have maintained our core investment philosophy as a real
estate value investor. We remained focused on stocks whose share prices, in our
view, provide real estate exposure at the best valuation relative to their
underlying asset values. We believe the standstill of private market transaction
activity in several sectors has directly contributed to pricing inefficiencies
in the public real estate securities market that are greater than we have
observed in recent years. In this environment, we have favored stocks whose
share prices we believe already more than reflect prospective declines in
underlying values. Our company-specific research led us to an overweighting to a
group of companies that are focused in the ownership of upscale urban hotels and
apartment properties, and an underweighting in companies concentrated in the
ownership of industrial properties, strip shopping centers, health care and
storage assets.
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 AS OF 05/31/08
Simon Property Group, Inc. 8.7%
Equity Residential 7.3
AvalonBay Communities, Inc. 6.7
Host Hotels & Resorts Inc. 5.6
Starwood Hotels & Resorts
Worldwide, Inc. 5.2
Brookfield Properties Corp.
(Canada) 5.1
Boston Properties, Inc. 5.1
Vornado Realty Trust 4.5
Regency Centers Corp. 4.1
Macerich Co. (The) 3.6
</Table>
<Table>
<Caption>
PORTFOLIO COMPOSITION AS OF 05/31/08
Common Stocks 96.6%
Short-Term Paper 3.4
</Table>
Subject to change daily. Provided for informational purposes only and should not
be deemed as a recommendation to buy or sell the securities mentioned above. Top
10 holdings are as a percentage of net assets and portfolio composition are as a
percentage of total investments. 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.
3
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. 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.
4
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) 869-NEWS, 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.
5
PERFORMANCE SUMMARY
AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED MAY 31, 2008
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS I SHARES++
(since 04/28/99) (since 04/28/99) (since 04/28/99) (since 04/28/99)
SYMBOL REFAX REFBX REFCX REFDX
1 YEAR (14.73)%(4) (15.39)%(4) (15.21)%(4) (14.52)%(4)
(19.21) (5) (18.08) (5) (15.75) (5) --
5 YEARS 19.53 (4) 18.62 (4) 18.68 (4) 19.82 (4)
18.24 (5) 18.45 (5) 18.68 (5) --
SINCE INCEPTION 14.88 (4) 14.10 (4) 14.02 (4) 15.18 (4)
14.20 (5) 14.10 (5) 14.02 (5) --
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/msim 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
I 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. Effective April 2005, Class B shares
will generally convert to Class A shares approximately eight years after the
end of the calendar month in which the shares were purchased. Performance
for periods greater than eight years reflects this conversion.
+ The maximum contingent deferred sales charge for Class C is 1.0% for shares
redeemed within one year of purchase.
++ Class I (formerly Class D) has no sales charge.
(1) The FTSE NAREIT Equity REITs Index measures the performance of real estate
securities, which will fluctuate with changes in the values of their
underlying properties. The Index is a benchmark of real estate investment
trusts compiled by the National Association of Real Estate Investment
Trusts. The Index is unmanaged and its 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 Standard & Poor's 500(R) Index (S&P 500(R)) is a broad-based index, the
performance of which is based on the performance of 500 widely-held common
stocks chosen for market size, liquidity and industry group representation.
The Index is unmanaged and its returns do not include any sales charges or
fees. Such costs would lower performance. It is not possible to invest
directly in an index.
(3) 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. The Fund is in the Lipper Real Estate Funds classification as of the
date of this report.
(4) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(5) 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.
6
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 12/01/07 - 05/31/08.
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@
------------- ------------- --------------
12/01/07 -
12/01/07 05/31/08 05/31/08
------------- ------------- --------------
CLASS A
Actual (1.69% return)......................... $1,000.00 $1,016.90 $ 8.27
Hypothetical (5% annual return before
expenses)................................... $1,000.00 $1,016.80 $ 8.27
CLASS B
Actual (1.28% return)......................... $1,000.00 $1,012.80 $12.13
Hypothetical (5% annual return before
expenses)................................... $1,000.00 $1,012.95 $12.13
CLASS C
Actual (1.46% return)......................... $1,000.00 $1,014.60 $10.83
Hypothetical (5% annual return before
expenses)................................... $1,000.00 $1,014.25 $10.83
CLASS I@@
Actual (1.84% return)......................... $1,000.00 $1,018.40 $ 7.11
Hypothetical (5% annual return before
expenses)................................... $1,000.00 $1,017.95 $ 7.11
</Table>
- ---------
@ Expenses are equal to the Fund's annualized expense ratios of 1.64%, 2.41%,
2.15% and 1.41% for Class A, Class B, Class C and Class I shares,
respectively, multiplied by the average account value over the period,
multiplied by 183/366 (to reflect the one-half year period).
@@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008.
7
Morgan Stanley Real Estate Fund
PORTFOLIO OF INVESTMENTS - MAY 31, 2008 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------
Common Stocks (97.7%)
Diversified (6.5%)
38,805 Forest City Enterprises, Inc. (Class
A)..................................... $ 1,552,200
35,650 Vornado Realty Trust - REIT............. 3,484,075
-----------
5,036,275
-----------
Health Care (5.8%)
66,092 Assisted Living Concepts, Inc. (a)...... 442,816
37,530 Brookdale Senior Living................. 990,041
7,500 Care Investment Trust Inc. - REIT....... 86,175
3,360 Extendicare Real Estate Investment
(Canada) - REIT........................ 32,937
37,995 Healthcare Realty Trust, Inc. - REIT.... 1,008,767
85,730 Senior Housing Properties Trust - REIT.. 1,904,063
610 Ventas, Inc. - REIT..................... 29,073
-----------
4,493,872
-----------
Industrial (4.8%)
28,970 AMB Property Corp. - REIT............... 1,707,492
9,250 DCT Industrial Trust, Inc. - REIT....... 90,187
31,855 ProLogis - REIT......................... 1,972,780
-----------
3,770,459
-----------
Industrial/Office (3.6%)
41,270 Duke Realty Corp. ...................... 1,059,814
36,083 Liberty Property Trust - REIT........... 1,280,947
8,343 PS Business Parks, Inc. (Class
A) - REIT.............................. 479,723
-----------
2,820,484
-----------
Lodging/Resorts (14.2%)
55,159 Hersha Hospitality Trust - REIT......... 524,562
252,894 Host Hotels & Resorts Inc. - REIT....... 4,347,248
52,844 Morgans Hotel Group Co. (a)............. 680,102
83,256 Starwood Hotels & Resorts Worldwide,
Inc. .................................. 4,029,590
108,729 Strategic Hotels & Resorts,
Inc. - REIT............................ 1,495,024
-----------
11,076,526
-----------
Office (15.2%)
40,462 Boston Properties, Inc. - REIT.......... 3,954,756
199,238 Brookfield Properties Corp. (Canada).... 4,006,676
22,031 Douglas Emmett Inc. - REIT.............. 539,759
9,832 Kilroy Realty Corp. - REIT.............. 536,041
70,652 Mack-Cali Realty Corp. - REIT........... 2,729,993
2,037 Parkway Properties, Inc. - REIT......... 77,447
-----------
11,844,672
-----------
Residential Apartments (18.4%)
51,348 AvalonBay Communities, Inc. - REIT...... 5,196,417
24,596 Camden Property Trust - REIT........... 1,211,599
133,938 Equity Residential - REIT............... 5,664,238
4,927 Essex Property Trust, Inc. - REIT....... 588,629
33,420 GMH Communities Trust - REIT............ 245,303
39,740 Post Properties, Inc. - REIT............ 1,411,167
-----------
14,317,353
-----------
Residential Manufactured Homes (1.7%)
26,896 Equity Lifestyle Properties,
Inc. - REIT............................ 1,336,462
-----------
Retail Regional Malls (14.9%)
31,057 General Growth Properties, Inc. - REIT.. 1,290,729
38,977 Macerich Co. (The) - REIT............... 2,788,025
68,249 Simon Property Group, Inc. - REIT....... 6,781,221
13,716 Taubman Centers, Inc. - REIT............ 737,235
-----------
11,597,210
-----------
Retail Strip Centers (7.6%)
34,810 Acadia Realty Trust - REIT.............. 861,199
106,300 BPP Liquidating Trust - REIT (a)(b)..... 0
1,413 Equity One, Inc. - REIT................. 32,796
17,869 Federal Realty Investment Trust - REIT.. 1,440,599
15,650 Ramco-Gershenson Properties
Trust - REIT........................... 349,778
48,558 Regency Centers Corp. - REIT............ 3,228,621
-----------
5,912,993
-----------
</Table>
See Notes to Financial Statements
8
Morgan Stanley Real Estate Fund
PORTFOLIO OF INVESTMENTS - MAY 31, 2008 (UNAUDITED) continued
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -------------------------------------------------------------------
Self Storage (3.0%)
19,464 Public Storage, Inc. - REIT............. $ 1,715,362
13,797 Sovran Self Storage, Inc. - REIT........ 609,689
-----------
2,325,051
-----------
Specialty (2.0%)
34,090 Plum Creek Timber Co., Inc. - REIT...... 1,590,299
-----------
Total Common Stocks
(Cost $47,836,230)...................... 76,121,656
-----------
<Caption>
NUMBER OF
SHARES (000)
- ------------
Short-Term Investment (3.5%)
Investment Company (c)
2,684 Morgan Stanley Institutional Liquidity
Money Market Portfolio - Institutional
Class
(Cost $2,683,736)...................... 2,683,736
-----------
</Table>
<Table>
Total Investments
(Cost $50,519,966) (d)..................... 101.2% 78,805,392
Liabilities In Excess of Other Assets...... (1.2) (923,300)
----- -----------
Net Assets................................. 100.0% $77,882,092
===== ===========
</Table>
- ----------
<Table>
REIT Real Estate Investment Trust.
(a) Non-income producing security.
(b) A security with a total market value equal to $0 has 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.
(c) See note 4 to the financial statements regarding investments in
Morgan Stanley Institutional Liquidity Money Market Portfolio-
Institutional class.
(d) The aggregate cost for federal income tax purposes approximates
the aggregate cost for book purposes. The aggregate gross
unrealized appreciation is $30,208,163 and the aggregate gross
unrealized depreciation is $1,922,737, resulting in net
unrealized appreciation of $28,285,426.
</Table>
<Table>
<Caption>
PERCENT OF
TOTAL
INDUSTRY VALUE INVESTMENTS
- -------------------------------------------------
Residential
Apartment........... $14,317,353 18.2%
Office................ 11,844,672 15.0
Retail Regional
Malls............... 11,597,210 14.7
Lodging/Resorts....... 11,076,526 14.1
Retail Strip Centers.. 5,912,993 7.5
Diversified........... 5,036,275 6.4
Industrial............ 3,770,459 4.8
Health Care........... 4,493,872 5.7
Industrial/Office..... 2,820,484 3.6
Investment Company.... 2,683,736 3.4
Self Storage.......... 2,325,051 2.9
Specialty............. 1,590,299 2.0
Residential
Manufactured Homes.. 1,336,462 1.7
----------- -----
$78,805,392 100.0%
=========== =====
</Table>
See Notes to Financial Statements
9
Morgan Stanley Real Estate Fund
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
May 31, 2008 (unaudited)
<Table>
Assets:
Investments in securities, at
value (cost $47,836,230)...... $76,121,656
Investment in affiliate, at
value (cost $2,683,736)....... 2,683,736
Receivable for:
Dividends.................... 109,369
Investments sold............. 13,799
Shares of beneficial interest
sold.......................... 11,981
Dividends from affiliate..... 6,375
Prepaid expenses and other
assets........................ 53,185
-----------
Total Assets................. 79,000,101
-----------
Liabilities:
Payable for:
Shares of beneficial interest
redeemed...................... 130,149
Investment advisory fee...... 53,432
Distribution fee............. 39,493
Transfer agent fee........... 8,191
Administration fee........... 5,388
Payable to bank................. 811,625
Accrued expenses and other
payables...................... 69,731
-----------
Total Liabilities............ 1,118,009
-----------
Net Assets................... $77,882,092
===========
Composition of Net Assets:
Paid-in-capital................. $41,360,219
Net unrealized appreciation..... 28,285,426
Accumulated undistributed net
investment income............. 756,189
Accumulated undistributed net
realized gain................. 7,480,258
-----------
Net Assets................... $77,882,092
===========
Class A Shares:
Net Assets...................... $34,134,186
Shares Outstanding (unlimited
authorized, $.01 par value)... 3,603,276
Net Asset Value Per Share.... $9.47
=====
Maximum Offering Price Per
Share,
(net assets value plus 5.54%
of net asset value).......... $9.99
=====
Class B Shares:
Net Assets...................... $27,339,839
Shares Outstanding (unlimited
authorized, $.01 par value)... 2,907,228
Net Asset Value Per Share.... $9.40
=====
Class C Shares:
Net Assets...................... $ 9,598,708
Shares Outstanding (unlimited
authorized, $.01 par value)... 1,021,321
Net Asset Value Per Share.... $9.40
=====
Class I Shares@@:
Net Assets...................... $ 6,809,359
Shares Outstanding (unlimited
authorized, $.01 par value)... 716,818
Net Asset Value Per Share.... $9.50
=====
</Table>
- ----------
@@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008.
Statement of Operations
For the six months ended May 31, 2008 (unaudited)
<Table>
Net Investment Income:
Income
Dividends (net of $9,022 foreign
withholding tax).............. $ 2,171,919
Dividends from affiliate........ 38,586
-----------
Total Income................. 2,210,505
-----------
Expenses
Investment advisory fee......... 323,462
Distribution fee (Class A
shares)....................... 39,988
Distribution fee (Class B
shares)....................... 147,543
Distribution fee (Class C
shares)....................... 36,406
Transfer agent fees and
expenses...................... 75,832
Shareholder reports and
notices....................... 37,713
Administration fee.............. 32,346
Professional fees............... 25,815
Registration fees............... 22,128
Custodian fees.................. 9,796
Trustees' fees and expenses..... 1,222
Other........................... 41,662
-----------
Total Expenses............... 793,913
Less: expense offset............ (328)
Less: rebate from Morgan Stanley
affiliate cash sweep (Note
4)............................ (1,107)
-----------
Net Expenses................. 792,478
-----------
Net Investment Income........ 1,418,027
-----------
Realized and Unrealized Gain
(Loss):
Realized Gain (Loss) on:
Investments..................... 6,119,309
Foreign exchange transactions... (371)
-----------
Net Realized Gain............ 6,118,938
Net Change in Unrealized
Appreciation/Depreciation on
Investments................... (7,256,219)
-----------
Net Loss..................... (1,137,281)
-----------
Net Increase.................... $ 280,746
===========
</Table>
See Notes to Financial Statements
10
Morgan Stanley Real Estate Fund
FINANCIAL STATEMENTS continued
Statements of Changes in Net Assets
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS END ENDED
MAY 31, 2008 NOVEMBER 30, 2007
------------ -----------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income............................... $ 1,418,027 $ 643,908
Net realized gain................................... 6,118,938 34,704,175
Net change in unrealized appreciation/depreciation.. (7,256,219) (50,836,202)
------------ ------------
Net Increase (Decrease).......................... 280,746 (15,488,119)
------------ ------------
Dividends and Distributions to Shareholders from:
Net investment income
Class A shares................................... (343,196) (520,100)(++)
Class B shares................................... (167,614) (204,060)(++)
Class C shares................................... (68,125) (58,110)(++)
Class I shares@@................................. (81,960) (186,050)(++)
Net realized gain
Class A shares................................... (13,498,465) (6,150,182)
Class B shares................................... (12,200,210) (15,450,360)
Class C shares................................... (3,857,917) (3,282,848)
Class I shares@@................................. (2,943,413) (2,503,180)
------------ ------------
Total Dividends and Distributions................ (33,160,900) (28,354,890)
------------ ------------
Net increase (decrease) from transactions in shares
of beneficial interest............................ 12,866,016 (25,506,539)
------------ ------------
Net Decrease..................................... (20,014,138) (69,349,548)
Net Assets:
Beginning of period................................. 97,896,230 167,245,778
------------ ------------
End of Period
(Including accumulated undistributed net investment
income of $756,189 and dividends in excess of net
investment income of $943, respectively)............ $ 77,882,092 $ 97,896,230
============ ============
</Table>
- ----------
++ Dividends in excess of net investment income.
@@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008.
See Notes to Financial Statements
11
Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (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 I
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 I shares are not subject to
a sales charge. Additionally, Class A shares, Class B shares and Class C shares
incur distribution expenses. Effective March 31, 2008, Class D shares were
renamed Class I shares.
The Fund will assess a 2% redemption fee, on Class A shares, Class B shares,
Class C shares, and Class I 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 including circumstances under which 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
12
Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (UNAUDITED) continued
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 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; (7) investments in open-end mutual funds, including the Morgan
Stanley Institutional Liquidity Funds, are valued at net assets value as of the
close of each business day; and (8) 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.
The Fund invests a substantial portion of its assets in securities of real
estate investment trusts ("REIT"). The market's perception of prospective
declines in private real estate values and other financial assets may result in
increased volatility of market prices that can negatively impact the valuation
of certain issuers held by the Fund.
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 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. 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.
D. 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 (2)
purchases, sales, income and expenses are translated at the exchange rates
prevailing on the respective dates of such
13
Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (UNAUDITED) continued
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 the securities.
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.
E. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of Subchapter M of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no provision for federal income
taxes is required. The Fund files tax returns with the U.S. Internal Revenue
Service, New York State and New York City. The Fund adopted the provisions of
the Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN
48") Accounting for Uncertainty in Income Taxes on May 30, 2008. FIN 48 sets
forth a minimum threshold for financial statement recognition of the benefit of
a tax position taken or expected to be taken in a tax return. The implementation
of FIN 48 did not result in any unrecognized tax benefits in the accompanying
financial statements. If applicable, the Fund recognizes interest accrued
related to unrecognized tax benefits in interest expense and penalties in other
expenses in the Statement of Operations. Each of the tax years in the four year
period ended May 31, 2008, remains subject to examination by taxing authorities.
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.
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.
14
Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (UNAUDITED) continued
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.
Under an agreement between the Administrator and State Street Bank and Trust
Company ("State Street"), State Street provides certain administrative services
to the Fund. For such services, the Administrator pays State Street a portion of
the fee the Administrator receives from 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 shares; (ii) Class
B -- up to 1.0% of the average daily net assets of Class B shares; and (iii)
Class C -- up to 1.0% of the average daily net assets of Class C shares.
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 $3,386,019
at May 31, 2008.
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 and other authorized
financial representatives at the time of sale may be reimbursed in the
subsequent calendar year. For the six months ended May 31, 2008, the
distribution fee was accrued for Class A shares and Class C shares at the annual
rate of 0.23% and 0.74%, respectively.
The Distributor has informed the Fund that for the six months ended May 31,
2008, it received contingent deferred sales charges from certain redemptions of
the Fund's Class A shares, Class B
15
Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (UNAUDITED) continued
shares and Class C shares of $38, $20,365 and $188, respectively and received
$8,757 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 Fund invests in Morgan Stanley Institutional Liquidity Money Market
Portfolio -- Institutional Class, an open-end management investment company
managed by the Investment Adviser. Investment advisory fees paid by the Fund are
reduced by an amount equal to the advisory and administrative service fees paid
by Morgan Stanley Institutional Liquidity Money Market
Portfolio -- Institutional Class with respect to assets invested by the Fund in
Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional
Class. For the six months ended May 31, 2008, advisory fees paid were reduced by
$1,107 relating to the Fund's investment in Morgan Stanley Institutional
Liquidity Money Market Portfolio -- Institutional Class. Income distributions
earned by the Fund are recorded as dividends from affiliate in the Statement of
Operations and totaled $38,586 for the six months ended May 31, 2008. During the
six months ended May 31, 2008, cost of purchases and sales of investments in
Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional
Class aggregated $16,948,762 and $14,805,977, respectively.
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended May 31, 2008 aggregated
$8,849,038 and $28,420,627, respectively.
For the six months ended May 31, 2008, the Fund incurred brokerage commissions
of $47 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, 2008, Morgan Stanley Multi-Asset Class Fund, an affiliate of the
Investment Adviser, Administrator and Distributor, held 143,354 Class I 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 or she 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.
16
Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (UNAUDITED) continued
5. Shares of Beneficial Interest++
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE SIX
MONTHS ENDED FOR THE YEAR
MAY 31, 2008 ENDED
----------------------- NOVEMBER 30, 2007
(unaudited) -------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- ---------- ------------
CLASS A SHARES
Sold................................... 189,851 $ 1,763,362 674,309 $ 11,585,000
Conversion from Class B................ 95,914 864,939 1,394,930 24,175,203
Reinvestment of dividends and
distributions........................ 1,402,284 12,613,720 356,893 5,849,406
Redeemed............................... (867,105) (8,140,086) (1,473,175) (24,248,876)
--------- ----------- ---------- ------------
Net increase - Class A................. 819,944 7,091,935 952,957 17,360,733
--------- ----------- ---------- ------------
CLASS B SHARES
Sold................................... 18,046 162,781 153,437 2,670,011
Conversion to Class A.................. (97,590) (864,939) (1,402,075) (24,175,203)
Reinvestment of dividends and
distributions........................ 1,222,928 10,936,747 797,655 13,014,504
Redeemed............................... (789,943) (7,540,044) (1,685,935) (27,834,091)
--------- ----------- ---------- ------------
Net increase (decrease) - Class B...... 353,441 2,694,545 (2,136,918) (36,324,779)
--------- ----------- ---------- ------------
CLASS C SHARES
Sold................................... 7,833 73,431 96,170 1,648,455
Reinvestment of dividends and
distributions........................ 403,557 3,605,593 177,600 2,897,242
Redeemed............................... (181,151) (1,683,249) (473,609) (7,816,436)
--------- ----------- ---------- ------------
Net increase (decrease) - Class C...... 230,239 1,995,775 (199,839) (3,270,739)
--------- ----------- ---------- ------------
CLASS I SHARES@@
Sold................................... 19,631 171,723 159,221 2,590,112
Reinvestment of dividends and
distributions........................ 220,976 1992,286 118,793 1,950,471
Redeemed............................... (116,510) (1,080,248) (469,700) (7,812,337)
--------- ----------- ---------- ------------
Net increase (decrease) - Class I...... 124,097 1,083,761 (191,686) (3,271,754)
--------- ----------- ---------- ------------
Net increase (decrease) in Fund........ 1,527,721 $12,866,016 (1,575,486) $(25,506,539)
========= =========== ========== ============
</Table>
- ----------
@@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008.
++ Effective at close of business on January 12, 2007, the Fund suspended
offering its shares to new investors, except as follows: The Fund will
continue to offer shares (1) through certain retirement plan accounts, (2)
to clients of registered investment advisers who currently offer shares of
the Fund in their discretionary asset allocation programs, (3) through
certain endowments and foundations, (4) to clients of family office
practices where shares of the Fund are held by family members of such
clients, (5) to directors and trustees of the Morgan Stanley funds, (6) to
Morgan Stanley affiliates and their employees and (7) to benefit plans
sponsored by Morgan Stanley and its affiliates. The Fund will continue to
offer shares to its existing shareholders and, as market conditions permit,
may recommence offering shares to other new investors in the future. Any
such offerings of the Fund's shares may be limited in amount and may
commence and terminate without any prior notice.
17
Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (UNAUDITED) continued
6. Expense Offset
The expense offset represents a reduction of the fees and expenses for interest
earned on cash balances maintained by the Fund with the transfer agent.
7. 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, 2007, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales.
8. Fair Valuation Measurements
The Fund adopted Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157"), effective
December 1, 2007. In accordance with FAS 157, fair value is defined as the price
that the Fund would receive to sell an investment or pay to transfer a liability
in a timely transaction with an independent buyer in the principal market, or in
the absence of a principal market the most advantageous market for the
investment or liability. FAS 157 establishes a three-tier hierarchy to
distinguish between (1) inputs that reflect the assumptions market participants
would use in pricing an asset or liability developed based on market data
obtained from sources independent of the reporting entity (observable inputs)
and (2) inputs that reflect the reporting entity's own assumptions about the
assumptions market participants would use in pricing an asset or liability
developed based on the best information available in the circumstances
(unobservable inputs) and to establish classification of fair value measurements
for disclosure purposes. Various inputs are used in determining the value of the
Fund's investments. The inputs are summarized in the three broad levels listed
below.
- Level 1 -- quoted prices in active markets for identical investments
- Level 2 -- other significant observable inputs (including quoted prices
for similar investments, interest rates, prepayment speeds, credit risk,
etc.)
- Level 3 -- significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
18
Morgan Stanley Real Estate Fund
NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (UNAUDITED) continued
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities.
The following is a summary of the inputs used as of May 31, 2008 in valuing the
Fund's investments carried at value:
<Table>
<Caption>
FAIR VALUE MEASUREMENTS AT MAY 31, 2008 USING
---------------------------------------------------
QUOTED PRICES IN SIGNIFICANT SIGNIFICANT
ACTIVE MARKET FOR OTHER OBSERVABLE UNOBSERVABLE
IDENTICAL ASSETS INPUTS INPUTS
TOTAL (LEVEL 1) (LEVEL 2) (LEVEL 3)
----------- ----------------- ---------------- ------------
Investments in Securities...... $78,805,392 $78,805,392 -- --
=========== =========== ========= ============
</Table>
Following is a reconciliation of investments in which significant unobservable
inputs (Level 3) were used in determining value:
<Table>
<Caption>
INVESTMENTS IN
SECURITIES
--------------
Beginning Balance.............................................. $ 5,315
Net purchases (sales)........................................ --
Transfers in and/or out...................................... --
Change in unrealized appreciation/depreciation............... (5,315)
Realized gains (losses)...................................... --
-------
Ending Balance................................................. $ --
=======
Net change in unrealized appreciation/depreciation from
investments still held as of May 31, 2008.................... $(5,315)
=======
</Table>
9. Accounting Pronouncement
On March 19, 2008, FASB released Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS
161"). SFAS 161 requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about credit-risk-
related contingent features in derivative agreements. The application of SFAS
161 is required for fiscal years beginning after November 15, 2008 and interim
periods within those fiscal years. At this time, management is evaluating the
implications of SFAS 161 and its impact on the financial statements has not yet
been determined.
19
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, 2008 2007 2006 2005 2004 2003
------------ ------- ------- ------- ------- ------
(unaudited)
Class A Shares
Selected Per Share Data:
Net asset value, beginning of period......... $14.60 $20.23 $19.72 $17.47 $13.58 $10.59
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income(1).................. 0.18 0.13 0.08 0.19 0.17 0.32
Net realized and unrealized gain (loss)... (0.21) (2.23) 5.73 3.60 4.29 3.20
------ ------ ----- ----- ----- -----
Total income (loss) from investment
operations.................................. (0.03) (2.10) 5.81 3.79 4.46 3.52
------ ------ ----- ----- ----- -----
Less dividends and distributions:
From net investment income................ (0.11) -- -- (0.20) (0.18) (0.32)
In excess of net investment income........ -- (0.20) (0.17) -- -- --
From net realized gain.................... (4.99) (3.33) (5.13) (1.34) (0.39) (0.21)
------ ------ ------ ------ ------ ------
Total dividends and distributions............ (5.10) (3.53) (5.30) (1.54) (0.57) (0.53)
------ ------ ------ ------ ------ ------
Net asset value, end of period............... $9.47 $14.60 $20.23 $19.72 $17.47 $13.58
===== ====== ====== ====== ====== ======
Total Return(2).............................. 1.69%(5) (12.00)% 39.68% 23.11% 33.84% 34.61%
Ratios to Average Net Assets(3):
Total expenses (before expense offset)....... 1.64%(4)(6) 1.45 %(4) 1.45% 1.50% 1.62% 1.62%
Net investment income........................ 3.83%(4)(6) 0.88 %(4) 0.51% 1.04% 1.21% 2.77%
Supplemental Data:
Net assets, end of period, in thousands...... $34,134 $40,643 $37,022 $23,622 $11,210 $7,378
Portfolio turnover rate...................... 11%(5) 23 % 20% 21% 14% 23%
</Table>
- ----------
<Table>
(1) The per share amounts were computed using an average number of shares
outstanding during the period.
(2) Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
(4) Reflects rebate of certain Fund expenses in connection with the
investments in Morgan Stanley Institutional Liquidity Money Market
Portfolio -- Institutional Class during the period. As a result of such
rebate, the expenses as a percentage of its net assets had an effect of
less than 0.005%.
(5) Not annualized.
(6) Annualized.
</Table>
See Notes to Financial Statements
20
Morgan Stanley Real Estate Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30,
MONTHS ENDED -------------------------------------------------
MAY 31, 2008 2007 2006 2005 2004 2003
------------ ------- ------- ------- -------- --------
(unaudited)
Class B Shares
Selected Per Share Data:
Net asset value, beginning of period......... $14.52 $20.12 $19.64 $17.40 $13.53 $10.55
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss)(1)........... 0.15 0.03 (0.04) 0.05 0.07 0.24
Net realized and unrealized gain (loss)... (0.22) (2.24) 5.69 3.59 4.26 3.19
------ ------ ----- ----- ----- -----
Total income (loss) from investment
operations.................................. (0.07) (2.21) 5.65 3.64 4.33 3.43
------ ------ ----- ----- ----- -----
Less dividends and distributions:
From net investment income................ (0.06) -- -- (0.06) (0.07) (0.24)
In excess of net investment income........ -- (0.06) (0.04) -- -- --
From net realized gain.................... (4.99) (3.33) (5.13) (1.34) (0.39) (0.21)
------ ------ ------ ------ ------ ------
Total dividends and distributions............ (5.05) (3.39) (5.17) (1.40) (0.46) (0.45)
------ ------ ------ ------ ------ ------
Net asset value, end of period............... $9.40 $14.52 $20.12 $19.64 $17.40 $13.53
===== ====== ====== ====== ====== ======
Total Return(2).............................. 1.28%(5) (12.67)% 38.56 % 22.18% 32.81% 33.64%
Ratios to Average Net Assets(3):
Total expenses (before expense offset)....... 2.41%(4)(6) 2.22 %(4) 2.21 % 2.26% 2.38% 2.37%
Net investment income (loss)................. 3.06%(4)(6) 0.11 %(4)(0.24)% 0.28% 0.45% 2.02%
Supplemental Data:
Net assets, end of period, in thousands...... $27,340 $37,094 $94,390 $95,184 $114,483 $108,680
Portfolio turnover rate...................... 11%(5) 23 % 20 % 21% 14% 23%
</Table>
- ----------
<Table>
(1) The per share amounts were computed using an average number of shares
outstanding during the period.
(2) Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
(4) Reflects rebate of certain Fund expenses in connection with the
investments in Morgan Stanley Institutional Liquidity Money Market
Portfolio -- Institutional Class during the period. As a result of such
rebate, the expenses as a percentage of its net assets had an effect of
less than 0.005%.
(5) Not annualized.
(6) Annualized.
</Table>
See Notes to Financial Statements
21
Morgan Stanley Real Estate Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30,
MONTHS ENDED -----------------------------------------------
MAY 31, 2008 2007 2006 2005 2004 2003
------------ ------- ------- ------- ------- -------
(unaudited)
Class C Shares
Selected Per Share Data:
Net asset value, beginning of period......... $14.52 $20.12 $19.64 $17.40 $13.53 $10.55
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income (loss)(1)........... 0.15 0.02 (0.04) 0.06 0.06 0.23
Net realized and unrealized gain (loss)... (0.21) (2.23) 5.70 3.59 4.27 3.20
------ ------ ----- ----- ----- -----
Total income (loss) from investment
operations.................................. (0.06) (2.21) 5.66 3.65 4.33 3.43
------ ------ ----- ----- ----- -----
Less dividends and distributions:
From net investment income................ (0.07) -- -- (0.07) (0.07) (0.24)
In excess of net investment income........ -- (0.06) (0.05) -- -- --
From net realized gain.................... (4.99) (3.33) (5.13) (1.34) (0.39) (0.21)
------ ------ ------ ------ ------ ------
Total dividends and distributions............ (5.06) (3.39) (5.18) (1.41) (0.46) (0.45)
------ ------ ------ ------ ------ ------
Net asset value, end of period............... $9.40 $14.52 $20.12 $19.64 $17.40 $13.53
===== ====== ====== ====== ====== ======
Total Return(2).............................. 1.46%(5) (12.64)% 38.63 % 22.24% 32.83% 33.54%
Ratios to Average Net Assets(3):
Total expenses (before expense offset)....... 2.15%(4)(6) 2.22 %(4) 2.18 % 2.23% 2.38% 2.37%
Net investment income (loss)................. 3.32%(4)(6) 0.11 %(4)(0.22)% 0.31% 0.45% 2.02%
Supplemental Data:
Net assets, end of period, in thousands...... $9,599 $11,486 $19,939 $15,434 $15,261 $12,359
Portfolio turnover rate...................... 11%(5) 23 % 20 % 21% 14% 23%
</Table>
- ----------
<Table>
(1) The per share amounts were computed using an average number of shares
outstanding during the period.
(2) Does not reflect the deduction of sales charge. Calculated based on the
net asset value as of the last business day of the period.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
(4) Reflects rebate of certain Fund expenses in connection with the
investments in Morgan Stanley Institutional Liquidity Money Market
Portfolio -- Institutional Class during the period. As a result of such
rebate, the expenses as a percentage of its net assets had an effect of
less than 0.005%.
(5) Not annualized.
(6) Annualized.
</Table>
See Notes to Financial Statements
22
Morgan Stanley Real Estate Fund
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30,
MONTHS ENDED ----------------------------------------------
MAY 31, 2008 2007 2006 2005 2004 2003
------------ ------ ------- ------- ------- -------
(unaudited)
Class I Shares@@
Selected Per Share Data:
Net asset value, beginning of period......... $14.63 $20.26 $19.75 $17.48 $13.59 $10.59
------ ------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income(1).................. 0.19 0.19 0.13 0.23 0.21 0.34
Net realized and unrealized gain (loss)... (0.21) (2.25) 5.73 3.62 4.28 3.22
------ ------ ----- ----- ----- -----
Total income (loss) from investment
operations.................................. (0.02) (2.06) 5.86 3.85 4.49 3.56
------ ------ ----- ----- ----- -----
Less dividends and distributions:
From net investment income................ (0.12) -- -- (0.24) (0.21) (0.35)
In excess of net investment income........ -- (0.24) (0.22) -- -- --
From net realized gain.................... (4.99) (3.33) (5.13) (1.34) (0.39) (0.21)
------ ------ ------ ------ ------ ------
Total dividends and distributions............ (5.11) (3.57) (5.35) (1.58) (0.60) (0.56)
------ ------ ------ ------ ------ ------
Net asset value, end of period............... $9.50 $14.63 $20.26 $19.75 $17.48 $13.59
===== ====== ====== ====== ====== ======
Total Return(2).............................. 1.84%(5) (11.77)% 39.96% 23.50% 34.13% 34.92%
Ratios to Average Net Assets(3):
Total expenses (before expense offset)....... 1.41%(4)(6) 1.22 %(4) 1.21% 1.26% 1.38% 1.37%
Net investment income........................ 4.06%(4)(6) 1.11 %(4) 0.76% 1.28% 1.45% 3.02%
Supplemental Data:
Net assets, end of period, in thousands...... $6,809 $8,674 $15,895 $16,017 $71,433 $58,930
Portfolio turnover rate...................... 11%(5) 23 % 20% 21% 14% 23%
</Table>
- ----------
<Table>
@@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008.
(1) The per share amounts were computed using an average number of shares
outstanding during the period.
(2) Calculated based on the net asset value as of the last business day of
the period.
(3) Reflects overall Fund ratios for investment income and non-class specific
expenses.
(4) Reflects rebate of certain Fund expenses in connection with the
investments in Morgan Stanley Institutional Liquidity Money Market
Portfolio -- Institutional Class during the period. As a result of such
rebate, the expenses as a percentage of its net assets had an effect of
less than 0.005%.
(5) Not annualized.
(6) Annualized.
</Table>
See Notes to Financial Statements
23
TRUSTEES
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
OFFICERS
Michael E. Nugent
Chairperson of the Board
Ronald E. Robison
President and Principal Executive Officer
Kevin Klingert
Vice President
Dennis F. Shea
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
LEGAL COUNSEL
Clifford Chance US LLP
31 West 52nd Street
New York, NY 10019
COUNSEL TO THE INDEPENDENT TRUSTEES
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, NY 10036
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
522 Fifth Avenue
New York, New York 10036
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.
Morgan Stanley Distributors Inc., member FINRA.
(c) 2008 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Real Estate Fund
Semiannual Report
May 31, 2008
REFSAN
LU08-03852P-Y05/08
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.
2
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 17, 2008
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 17, 2008
/s/ Francis Smith
- -------------------------------------
Francis Smith
Principal Financial Officer
July 17, 2008
3