<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-09117
Morgan Stanley Real Estate Fund
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: November 30, 2005
Date of reporting period: November 30, 2005
Item 1 - Report to Shareholders
<Page>
WELCOME, SHAREHOLDER:
IN THIS REPORT, YOU'LL LEARN ABOUT HOW YOUR INVESTMENT IN MORGAN STANLEY REAL
ESTATE FUND PERFORMED DURING THE ANNUAL 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.
<Page>
FUND REPORT
For the year ended November 30, 2005
TOTAL RETURN FOR THE 12 MONTHS ENDED NOVEMBER 30, 2005
<Table>
<Caption>
NAREIT LIPPER REAL
EQUITY ESTATE FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2)
23.11% 22.18% 22.24% 23.50% 17.84% 17.98%
</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 12-month review period was very positive for both direct real estate assets
and the public real estate securities market. After retreating in the first
quarter of 2005, real estate investment trusts ("REITs") rallied strongly in the
second and third quarters of 2005, and continued their advance through October
and November. Increased institutional investor interest in real estate
contributed to the continued strengthening of real estate asset values. Ongoing
improvements in underlying real estate fundamentals and takeover speculation
further bolstered the sector.
Among the major U.S. REIT sectors, retail, office and apartment stocks
outperformed. Retail remained the one sector within real estate where landlords
maintained pricing power and properties continued to produce improving operating
cash flow. Moreover, during the period, tenants and landlords alike remained
optimistic about the fundamentals for both retailers and retail real estate.
Although retail stocks were hindered in the latter portion of the period by
concerns that surging energy costs could lead to a potential slowdown in
consumer spending, these concerns abated amid better-than-expected earnings and
sales growth and favorable outlooks from mall companies. That said, not all
areas within the retail sector performed with equal strength, however; the mall
sub-sector outperformed while the strip center sub-sector underperformed.
The outperformance of office companies appeared to be driven by investors'
upbeat outlook for a recovery in this sector, given that fundamentals seemed to
have finally stopped deteriorating. However, the performance of the office
sector reflected the expectation that the extent of the recovery would vary by
geographic markets and asset quality. In the apartment sector, the release of
third-quarter earnings provided further evidence that the sector's recovery was
underway. Numerous take-private transactions in the sector suggested that the
apartment companies were trading below the private market value of their assets.
Several apartment companies also rallied on speculation for further corporate
activity.
Among the smaller REIT sectors, storage was the best performing sector, while
the hotel and healthcare sectors underperformed. Both the storage and hotel
sectors experienced improvements in operating results and benefited from the
short-term nature of their leases and relatively limited new supply. Yet, while
storage posted good gains, hotel REITs were hurt by investor concerns that a
slower economy could impact demand.
2
<Page>
PERFORMANCE ANALYSIS
Morgan Stanley Real Estate Fund outperformed the NAREIT Equity Index and the
Lipper Real Estate Funds Index for the 12 months ended November 30, 2005,
assuming no deduction of applicable sales charges. The Fund's outperformance was
driven by both bottom-up stock selection and top-down sector allocation.
Stock selection was favorable in every sector and particularly strong in the
office, retail and apartment sectors. In the office sector, the Fund benefited
from its focus on owners of Class A office properties in central business
district locations. Within retail, the Fund was well served by holdings in the
mall sector. Here, we favored owners of the highest quality malls in dominant
trade areas. Holdings within the strip center sector also contributed to
outperformance, due to a bias to owners of in-fill centers anchored by leading
grocers, and to dominant community centers with multiple key anchor tenants. In
the apartment sector, an emphasis on owners of assets in the coastal markets
proved advantageous.
From a top-down perspective, the Fund's allocations were favorable across
virtually every sector except for hotels, where an overweight relative to the
NAREIT benchmark detracted from performance. From an allocation perspective, the
most significant favorable contributors were the Fund's overweight in the
storage sector and an underweight in the mixed office/industrial sector.
THERE IS NO GUARANTEE THAT ANY SECTORS MENTIONED WILL CONTINUE TO PERFORM WELL
OR THAT SECURITIES IN SUCH SECTORS WILL BE HELD BY THE FUND IN THE FUTURE.
TOP 10 HOLDINGS
<Table>
Simon Property Group, Inc. 10.2%
Boston Properties, Inc. 5.9
AvalonBay Communities, Inc. 5.6
Host Marriott Corp. 5.5
Archstone-Smith Trust 4.8
Brookfield Properties Corp. (Canada) 4.8
Starwood Hotels & Resorts Worldwide, Inc. 4.5
Hilton Hotels Corp. 4.2
AMB Property Corp. 3.9
Regency Centers Corp. 3.8
</Table>
PORTFOLIO COMPOSITION
<Table>
Common Stocks 98.9%
Short-Term Paper 1.1
</Table>
DATA AS OF NOVEMBER 30, 2005. SUBJECT TO CHANGE DAILY. ALL PERCENTAGES FOR TOP
10 HOLDINGS ARE AS A PERCENTAGE OF NET ASSETS AND ALL PERCENTAGES FOR PORTFOLIO
COMPOSITION ARE AS A PERCENTAGE OF TOTAL INVESTMENTS. THESE DATA ARE PROVIDED
FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE DEEMED A RECOMMENDATION TO BUY
OR SELL THE SECURITIES MENTIONED. MORGAN STANLEY IS A FULL-SERVICE SECURITIES
FIRM ENGAGED IN SECURITIES TRADING AND BROKERAGE ACTIVITIES, INVESTMENT BANKING,
RESEARCH AND ANALYSIS, FINANCING AND FINANCIAL ADVISORY SERVICES.
3
<Page>
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% OF THE VALUE OF ITS ASSETS INVESTED IN U.S. RESIDENTIAL,
COMMERCIAL OR INDUSTRIAL REAL ESTATE. COMPANIES PRIMARILY ENGAGED IN THE REAL
ESTATE INDUSTRY MAY INCLUDE REAL ESTATE INVESTMENT TRUSTS KNOWN AS "REITS,"
WHICH POOL INVESTOR FUNDS MOSTLY FOR INVESTMENT IN COMMERCIAL REAL ESTATE
PROPERTIES. THEY ALSO MAY INCLUDE, AMONG OTHER BUSINESSES, REAL ESTATE
DEVELOPERS, BROKERS AND OPERATING COMPANIES, AS WELL AS COMPANIES WHOSE PRODUCTS
AND SERVICES ARE SIGNIFICANTLY RELATED TO THE REAL ESTATE INDUSTRY, SUCH AS
BUILDING SUPPLIERS AND MORTGAGE LENDERS. IN DECIDING WHICH SECURITIES TO BUY,
HOLD OR SELL, THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT
ADVISORS INC., CONSIDERS MARKET, ECONOMIC AND POLITICAL FACTORS.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, www.morganstanley.com. EACH MORGAN
STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC
FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES
NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS,
NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY,
HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS
FILINGS) BY ACCESSING THE SEC'S WEB SITE, http://www.sec.gov. YOU MAY ALSO
REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC.
INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED
BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE
MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S
E-MAIL ADDRESS (publicinfo@sec.gov) OR BY WRITING THE PUBLIC REFERENCE SECTION
OF THE SEC, WASHINGTON, DC 20549-0102.
PROXY VOTING 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
4
<Page>
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.
5
<Page>
PERFORMANCE SUMMARY
[CHART]
PERFORMANCE OF $10,000 INVESTMENT
($ IN THOUSANDS)
<Table>
<Caption>
CLASS A^^ CLASS B^^ CLASS C^^ CLASS D^^ NAREIT EQUITY INDEX(1) LIPPER REAL ESTATE FUNDS INDEX(2)
28-Apr-1999 $ 9,475 $ 10,000 $ 10,000 $ 10,000 $ 10,000 $ 10,000
31-May-1999 $ 9,655 $ 10,190 $ 10,190 $ 10,190 $ 10,304 $ 10,290
31-Aug-1999 $ 9,140 $ 9,624 $ 9,623 $ 9,660 $ 9,690 $ 9,640
30-Nov-1999 $ 8,349 $ 8,773 $ 8,771 $ 8,831 $ 8,944 $ 8,875
29-Feb-2000 $ 8,619 $ 9,040 $ 9,037 $ 9,124 $ 9,148 $ 8,988
31-May-2000 $ 9,607 $ 10,058 $ 10,053 $ 10,196 $ 10,183 $ 9,957
31-Aug-2000 $ 10,544 $ 11,008 $ 11,014 $ 11,182 $ 10,896 $ 10,832
30-Nov-2000 $ 10,642 $ 11,091 $ 11,096 $ 11,293 $ 10,893 $ 10,879
28-Feb-2001 $ 11,239 $ 11,683 $ 11,687 $ 11,933 $ 11,594 $ 11,478
31-May-2001 $ 11,559 $ 11,996 $ 11,999 $ 12,282 $ 12,275 $ 11,939
31-Aug-2001 $ 12,387 $ 12,825 $ 12,828 $ 13,158 $ 13,203 $ 12,748
30-Nov-2001 $ 11,959 $ 12,356 $ 12,360 $ 12,714 $ 12,969 $ 12,365
28-Feb-2002 $ 12,508 $ 12,911 $ 12,903 $ 13,306 $ 13,568 $ 13,070
31-May-2002 $ 13,364 $ 13,762 $ 13,754 $ 14,223 $ 14,701 $ 14,122
31-Aug-2002 $ 12,697 $ 13,051 $ 13,055 $ 13,523 $ 14,284 $ 13,636
30-Nov-2002 $ 12,064 $ 12,374 $ 12,379 $ 12,859 $ 13,691 $ 13,080
28-Feb-2003 $ 11,997 $ 12,294 $ 12,287 $ 12,796 $ 13,613 $ 13,072
31-May-2003 $ 13,711 $ 14,005 $ 14,010 $ 14,631 $ 15,372 $ 14,779
31-Aug-2003 $ 14,960 $ 15,257 $ 15,249 $ 15,959 $ 16,635 $ 15,992
30-Nov-2003 $ 16,240 $ 16,537 $ 16,531 $ 17,349 $ 18,275 $ 17,610
29-Feb-2004 $ 17,690 $ 17,973 $ 17,978 $ 18,908 $ 20,078 $ 19,199
31-May-2004 $ 17,439 $ 17,683 $ 17,677 $ 18,650 $ 19,388 $ 18,617
31-Aug-2004 $ 19,533 $ 19,778 $ 19,772 $ 20,900 $ 21,611 $ 20,614
30-Nov-2004 $ 21,737 $ 21,963 $ 21,957 $ 23,270 $ 23,735 $ 22,648
28-Feb-2005 $ 21,848 $ 22,035 $ 22,029 $ 23,403 $ 23,496 $ 23,035
31-May-2005 $ 23,528 $ 23,673 $ 23,689 $ 25,214 $ 25,207 $ 24,313
31-Aug-2005 $ 25,621 $ 25,740 $ 25,758 $ 27,485 $ 27,327 $ 26,144
30-Nov-2005 $ 26,761 $ 26,835 $ 26,841 $ 28,740 $ 27,970 $ 26,720
</Table>
6
<Page>
AVERAGE ANNUAL TOTAL RETURNS--PERIOD ENDED NOVEMBER 30, 2005
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS D SHARES++
(SINCE 04/28/99) (SINCE 04/28/99) (SINCE 04/28/99) (SINCE 04/28/99)
SYMBOL REFAX REFBX REFCX REFDX
1 YEAR 23.11%(3) 22.18%(3) 22.24%(3) 23.50%(3)
16.65(4) 17.18(4) 21.24(4) --
5 YEARS 20.25(3) 19.33(3) 19.32(3) 20.54(3)
18.96(4) 19.13(4) 19.32(4) --
SINCE INCEPTION 17.06(3) 16.15(3) 16.16(3) 17.37(3)
16.10(4) 16.15(4) 16.16(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 GRAPH AND TABLE DO 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 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.
^^ ENDING VALUE ASSUMING A COMPLETE REDEMPTION ON NOVEMBER 30, 2005.
7
<Page>
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 06/01/05 - 11/30/05.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) and redemption fees. Therefore, the second line of the table is
useful in comparing ongoing costs, and will not help you determine the relative
total cost of owning different funds. In addition, if these transactional costs
were included, your costs would have been higher.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- -----------------
06/01/05 -
06/01/05 11/30/05 11/30/05
------------- ------------- -----------------
CLASS A
Actual (13.74% return) $ 1,000.00 $ 1,137.40 $ 8.25
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,017.35 $ 7.79
CLASS B
Actual (13.35% return) $ 1,000.00 $ 1,133.50 $ 12.25
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,013.59 $ 11.56
CLASS C
Actual (13.30% return) $ 1,000.00 $ 1,133.00 $ 12.24
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,013.59 $ 11.56
CLASS D
Actual (13.98% return) $ 1,000.00 $ 1,139.80 $ 6.92
Hypothetical (5% annual return before expenses) $ 1,000.00 $ 1,018.60 $ 6.53
</Table>
- ----------
* EXPENSES ARE EQUAL TO THE FUND'S ANNUALIZED EXPENSE RATIO OF 1.54%, 2.29%,
2.29% AND 1.29% FOR CLASS A, CLASS B, CLASS C AND CLASS D SHARES,
RESPECTIVELY, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD,
MULTIPLIED BY 183/365 (TO REFLECT THE ONE-HALF YEAR PERIOD).
8
<Page>
MORGAN STANLEY REAL ESTATE FUND
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2005
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------
Common Stocks (99.3%)
HOSPITAL/NURSING
MANAGEMENT (0.1%)
4,100 Brookdale Senior
Living Inc.* $ 109,060
----------------
HOTELS/RESORTS/
CRUISELINES (8.7%)
289,934 Hilton Hotels Corp. 6,355,353
10,267 Interstate Hotels &
Resorts Inc.* 46,510
110,725 Starwood Hotels &
Resorts Worldwide, Inc. 6,698,863
----------------
13,100,726
----------------
REAL ESTATE - INDUSTRIAL/
OFFICE (4.8%)
240,867 Brookfield Properties
Corp. (Canada) 7,180,245
----------------
REAL ESTATE - RETAIL (1.5%)
58,060 Forest City Enterprise,
Inc. (Class A) 2,257,373
----------------
REIT - DIVERSIFIED (2.1%)
25,300 Spirit Finance Corp. 290,950
33,960 Vornado Realty Trust 2,898,486
----------------
3,189,436
----------------
REIT - HEALTHCARE (2.8%)
19,130 Cogdell Spencer Inc.* 320,428
29,100 Health Care Property
Investors, Inc. 764,457
14,700 LTC Properties, Inc. 301,056
138,800 Senior Housing
Properties Trust 2,610,828
3,500 Sunrise Senior Living,
Inc. (Canada) 39,059
4,000 Universal Health Realty
Income Trust 132,560
7,585 Windrose Medical
Properties Trust 113,775
----------------
4,282,163
----------------
REIT - INDUSTRIAL/OFFICE (25.0%)
125,780 AMB Property Corp. $ 5,881,473
106,500 Arden Realty, Inc. 4,843,620
117,095 Boston Properties, Inc. 8,806,715
34,755 Brandywine Realty Trust 1,007,200
5,510 CarrAmerica Realty Corp. 194,503
100,910 Equity Office Properties Trust 3,146,374
11,160 Liberty Property Trust 473,854
75,672 Mack-Cali Realty Corp. 3,342,432
8,795 Parkway Properties, Inc. 367,631
32,250 Prentiss Properties Trust 1,322,250
32,355 ProLogis 1,467,623
19,875 PS Business Parks,
Inc. (Class A) 936,112
77,170 Reckson Associates
Realty Corp. 2,834,454
25,780 SL Green Realty Corp. 1,903,853
42,970 Trizec Properties, Inc. 965,966
----------------
37,494,060
----------------
REIT - LODGING/RESORTS (6.4%)
460,945 Host Marriott Corp. 8,250,916
107,100 Legacy Hotels REIT (Canada) 723,561
66,055 MeriStar Hospitality Corp.* 646,678
----------------
9,621,155
----------------
REIT - RESIDENTIAL (18.6%)
15,735 American Campus
Communities, Inc. 396,050
172,397 Archstone-Smith Trust 7,207,919
91,620 AvalonBay Communities, Inc. 8,378,649
5,570 BRE Properties,
Inc. (Class A) 259,339
39,230 Equity Lifestyle
Properties, Inc. 1,818,703
110,803 Equity Residential 4,516,330
46,340 Essex Property Trust, Inc. 4,249,378
24,155 Post Properties, Inc. 977,311
6,090 United Dominion Realty
Trust, Inc. 136,355
----------------
27,940,034
----------------
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
9
<Page>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- -----------------------------------------------------------------------------------------
REIT - RETAIL (23.0%)
31,045 Acadia Realty Trust $ 635,802
106,300 BPP Liquidating Trust++ 23,386
17,700 Cedar Shopping Centers Inc. 243,375
86,250 Federal Realty
Investment Trust 5,432,025
14,415 General Growth
Properties, Inc. 657,612
53,840 Macerich Co. (The) 3,660,043
6,860 Mills Corp. 294,294
5,300 Ramco-Gershenson
Properties Trust 145,379
97,665 Regency Centers Corp. 5,669,453
198,359 Simon Property Group, Inc. 15,335,134
69,145 Taubman Centers, Inc. 2,421,458
----------------
34,517,961
----------------
REIT - SPECIALTY (0.2%)
11,280 Correctional Properties Trust 324,413
----------------
REIT - STORAGE (6.1%)
70,965 Public Storage, Inc. 5,010,129
72,135 Shurgard Storage Centers,
Inc. (Class A) 4,221,340
----------------
9,231,469
----------------
Total Common Stocks
(COST $83,445,569) 149,248,095
----------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS VALUE
- -----------------------------------------------------------------------------------------
Short-Term Investment (1.1%)
Repurchase Agreement
$ 1,600 Joint repurcase agreement
account 4.005% due
12/01/05 (dated 11/30/05;
proceeds $1,600,178) (a)
(COST $1,600,000) $ 1,600,000
----------------
Total Investments
(COST $85,045,569)(b) 100.4% 150,848,095
Liabilities in Excess of Other
Assets (0.4) (590,797)
----- ----------------
Net Assets 100.0% $ 150,257,298
===== ================
</Table>
- ----------
REIT REAL ESTATE INVESTMENT TRUST.
* NON-INCOME PRODUCING SECURITY.
++ A SECURITY WITH A TOTAL MARKET VALUE EQUAL TO $23,386 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.
(a) COLLATERALIZED BY FEDERAL AGENCY AND U.S. TREASURY OBLIGATIONS.
(b) THE AGGREGATE COST FOR FEDERAL INCOME TAX PURPOSES IS $85,491,207. THE
AGGREGATE GROSS UNREALIZED APPRECIATION IS $65,438,120 AND THE AGGREGATE
GROSS UNREALIZED DEPRECIATION IS $81,232, RESULTING IN NET UNREALIZED
APPRECIATION OF $65,356,888.
SEE NOTES TO FINANCIAL STATEMENTS
10
<Page>
MORGAN STANLEY REAL ESTATE FUND
SUMMARY OF INVESTMENTS - NOVEMBER 30, 2005
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ----------------------------------------------------------------------
REIT - Industrial/Office $ 37,494,060 25.0%
REIT - Retail 34,517,961 23.0
REIT - Residential 27,940,034 18.6
Hotels/Resorts/
Cruiselines 13,100,726 8.7
REIT - Lodging/Resorts 9,621,155 6.4
REIT - Storage 9,231,469 6.1
Real Estate - Industrial/
Office 7,180,245 4.8
REIT - Healthcare 4,282,163 2.8
REIT - Diversified 3,189,436 2.1
Real Estate - Retail 2,257,373 1.5
Repurchase Agreement 1,600,000 1.1
REIT - Specialty 324,413 0.2
Hospital/Nursing
Management 109,060 0.1
--------------- ----------
$ 150,848,095 100.4%
=============== ==========
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
11
<Page>
MORGAN STANLEY REAL ESTATE FUND
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
NOVEMBER 30, 2005
<Table>
Assets:
Investments in securities, at value (cost $85,045,569) $ 150,848,095
Cash (including foreign currency valued at $214,525 with a cost of $210,424) 230,670
Receivable for:
Investments sold 399,741
Dividends 217,514
Shares of beneficial interest sold 139,022
Prepaid expenses and other assets 17,323
----------------
Total Assets 151,852,365
----------------
Liabilities:
Payable for:
Investments purchased 785,995
Shares of beneficial interest redeemed 524,317
Investment advisory fee 116,873
Distribution fee 94,579
Administration fee 11,687
Accrued expenses and other payables 61,616
----------------
Total Liabilities 1,595,067
----------------
Net Assets $ 150,257,298
================
Composition of Net Assets:
Paid-in-capital $ 47,037,094
Net unrealized appreciation 65,806,559
Dividends in excess of net investment income (85,032)
Accumulated undistributed net realized gain 37,498,677
----------------
Net Assets $ 150,257,298
================
Class A Shares:
Net Assets $ 23,622,207
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 1,197,688
Net Asset Value Per Share $ 19.72
================
Maximum Offering Price Per Share,
(NET ASSET VALUE PLUS 5.54% OF NET ASSET VALUE) $ 20.81
================
Class B Shares:
Net Assets $ 95,184,038
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 4,845,971
Net Asset Value Per Share $ 19.64
================
Class C Shares:
Net Assets $ 15,434,468
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 785,677
Net Asset Value Per Share $ 19.64
================
Class D Shares:
Net Assets $ 16,016,585
Shares Outstanding (UNLIMITED AUTHORIZED, $.01 PAR VALUE) 810,846
Net Asset Value Per Share $ 19.75
================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
12
<Page>
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2005
<Table>
NET INVESTMENT INCOME:
INCOME
Dividends (net of $37,295 foreign withholding tax) $ 5,112,924
Interest 62,120
----------------
TOTAL INCOME 5,175,044
----------------
EXPENSES
Investment advisory fee 1,631,463
Distribution fee (Class A shares) 43,372
Distribution fee (Class B shares) 1,034,163
Distribution fee (Class C shares) 144,191
Transfer agent fees and expenses 489,413
Administration fee 163,146
Professional fees 84,256
Shareholder reports and notices 81,063
Registration fees 64,324
Custodian fees 25,449
Tax expense 14,940
Trustees' fees and expenses 2,643
Other 15,813
----------------
TOTAL EXPENSES 3,794,236
----------------
NET INVESTMENT INCOME 1,380,808
----------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
NET REALIZED GAIN ON:
Investments 46,721,873
Capital gain distributions received 2,405,787
----------------
NET REALIZED GAIN 49,127,660
----------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ON:
Investments (9,764,451)
Translation of other assets and liabilities denominated in foreign currencies 4,033
----------------
NET DEPRECIATION (9,760,418)
----------------
NET GAIN 39,367,242
----------------
NET INCREASE $ 40,748,050
================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
13
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
NOVEMBER 30, 2005 NOVEMBER 30, 2004
------------------ ------------------
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income $ 1,380,808 $ 1,557,307
Net realized gain 49,127,660 16,856,003
Net change in unrealized appreciation (9,760,418) 36,629,782
------------------ ------------------
NET INCREASE 40,748,050 55,043,092
------------------ ------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A shares (181,905) (102,372)
Class B shares (328,887) (488,097)
Class C shares (53,654) (62,756)
Class D shares (918,009) (904,175)
Net realized gain
Class A shares (937,896) (223,387)
Class B shares (8,590,969) (2,964,660)
Class C shares (1,164,677) (360,473)
Class D shares (5,416,036) (1,697,666)
------------------ ------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (17,592,033) (6,803,586)
------------------ ------------------
Net decrease from transactions in shares of beneficial interest (85,285,545) (23,199,579)
------------------ ------------------
NET INCREASE (DECREASE) (62,129,528) 25,039,927
NET ASSETS:
Beginning of period 212,386,826 187,346,899
------------------ ------------------
END OF PERIOD
(INCLUDING DIVIDENDS IN EXCESS OF NET INVESTMENT INCOME OF $85,032 AND
$93, RESPECTIVELY) $ 150,257,298 $ 212,386,826
================== ==================
</Table>
SEE NOTES TO FINANCIAL STATEMENTS
14
<Page>
MORGAN STANLEY REAL ESTATE FUND
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2005
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.
Effective August 29, 2005, the Board of Trustees of the Fund approved the
implementation of 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. 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 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
15
<Page>
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 (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
16
<Page>
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.
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.
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 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.
17
<Page>
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 $4,818,532
at November 30, 2005.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the year ended November 30, 2005, the distribution fee was accrued for Class
A shares and Class C shares at the annual rate of 0.24% and 0.97%, respectively.
The Distributor has informed the Fund that for the year ended November 30, 2005,
it received contingent deferred sales charges from certain redemptions of the
Fund's Class A shares, Class B shares and Class C shares of $5, $209,655 and
$4,906, respectively and received $71,614 in front-end sales charges from sales
of the Fund's Class A shares. The respective shareholders pay such charges which
are not an expense of the Fund.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended November 30, 2005 aggregated
$42,628,513 and $134,402,020, respectively. Included in the aforementioned
transactions are sales of $49,674,260 with other Morgan Stanley funds, including
a realized gain of $18,957,516.
For the year ended November 30, 2005, the Fund incurred brokerage commissions of
$3,458 with Morgan Stanley & Co., Inc., an affiliate of the Investment Adviser,
Administrator and Distributor, for portfolio transactions executed on behalf of
the Fund.
At November 30, 2005, Morgan Stanley Multi-Asset Class Fund, an affiliate of the
Investment Adviser, Administrator and Distributor, owned 52,529 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.
18
<Page>
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. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
NOVEMBER 30, 2005 NOVEMBER 30, 2004
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
CLASS A SHARES
Sold 348,655 $ 6,249,309 368,160 $ 5,452,520
Conversion from Class B 627,848 10,536,868 -- --
Reinvestment of dividends and distributions 58,038 1,008,323 19,518 280,997
Redeemed (478,579) (8,430,720) (289,261) (4,229,999)
------------- ------------- ------------- -------------
Net increase -- Class A 555,962 9,363,780 98,417 1,503,518
------------- ------------- ------------- -------------
CLASS B SHARES
Sold 653,908 11,459,961 1,191,679 17,949,122
Conversion to Class A (630,122) (10,536,868) -- --
Reinvestment of dividends and distributions 444,566 7,623,651 196,997 2,806,099
Redeemed (2,203,171) (38,678,267) (2,843,101) (41,161,407)
------------- ------------- ------------- -------------
Net decrease -- Class B (1,734,819) (30,131,523) (1,454,425) (20,406,186)
------------- ------------- ------------- -------------
CLASS C SHARES
Sold 178,578 3,188,449 254,222 3,761,809
Reinvestment of dividends and distributions 64,322 1,103,967 25,669 366,935
Redeemed (334,237) (5,845,680) (316,260) (4,612,766)
------------- ------------- ------------- -------------
Net decrease -- Class C (91,337) (1,553,264) (36,369) (484,022)
------------- ------------- ------------- -------------
CLASS D SHARES
Sold 283,870 4,911,964 777,867 11,556,107
Reinvestment of dividends and distributions 315,345 5,439,719 154,916 2,230,010
Redeemed (3,874,438) (73,316,221) (1,183,528) (17,599,006)
------------- ------------- ------------- -------------
Net decrease -- Class D (3,275,223) (62,964,538) (250,745) (3,812,889)
------------- ------------- ------------- -------------
Net decrease in Fund (4,545,417) $ (85,285,545) (1,643,122) $ (23,199,579)
============= ============= ============= =============
</Table>
19
<Page>
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.
The tax character of distributions paid was as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
NOVEMBER 30, 2005 NOVEMBER 30, 2004
----------------- -----------------
Ordinary income $ 3,285,435 $ 3,966,591
Long-term capital gains 14,306,598 2,836,995
----------------- -----------------
Total distributions $ 17,592,033 $ 6,803,586
================= =================
</Table>
As of November 30, 2005, the tax-basis components of accumulated earnings were
as follows:
<Table>
Undistributed ordinary income --
Undistributed long-term gains $ 37,859,527
-----------------
Net accumulated earnings 37,859,527
Temporary differences (244)
Net unrealized appreciation 65,360,921
-----------------
Total accumulated earnings $ 103,220,204
=================
</Table>
As of November 30, 2005, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales and permanent book/tax
differences primarily attributable to equalization debits. To reflect
reclassifications arising from the permanent differences, accumulated
undistributed net realized gain was charged $8,811,661, dividends in excess of
net investment income was credited $16,708 and paid-in-capital was creditied
$8,794,953.
7. LEGAL MATTERS
The Investment Adviser, certain affiliates of the Investment Adviser, certain
officers of such affiliates and certain investment companies advised by the
Investment Adviser or its affiliates, including the Fund, are named as
defendants in a consolidated class action. This consolidated action also names
as defendants certain individual Trustees and Directors of the Morgan Stanley
funds. The consolidated amended complaint, 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
20
<Page>
fiduciary duties by failing properly to disclose (i) that the Investment Adviser
and certain affiliates of the Investment Adviser allegedly offered economic
incentives to brokers and others to recommend the funds advised by the
Investment Adviser or its affiliates to investors rather than funds managed by
other companies, and (ii) that the funds advised by the Investment Adviser or
its affiliates, including the Fund, allegedly paid excessive commissions to
brokers in return for their efforts to recommend these funds to investors. The
complaint seeks, among other things, unspecified compensatory damages,
rescissionary damages, fees and costs. The defendants have moved to dismiss the
action and intend to otherwise vigorously defend it. On March 9, 2005,
Plaintiffs sought leave to supplement their complaint to assert claims on behalf
of other investors. While the Fund and Adviser believe that each has meritorious
defenses, the ultimate outcome of this matter is not presently determinable at
this stage of the litigation, and no provision has been made in the Fund's
financial statements for the effect, if any, of this matter.
21
<Page>
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 YEAR ENDED NOVEMBER 30,
-----------------------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
CLASS A SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 17.47 $ 13.58 $ 10.59 $ 11.39 $ 10.51
--------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income++ 0.19 0.17 0.32 0.29 0.35
Net realized and unrealized gain (loss) 3.60 4.29 3.20 (0.17) 0.93
--------- --------- --------- --------- ---------
Total income from investment operations 3.79 4.46 3.52 0.12 1.28
--------- --------- --------- --------- ---------
Less dividends and distributions from:
Net investment income (0.20) (0.18) (0.32) (0.28) (0.35)
Net realized gain (1.34) (0.39) (0.21) (0.64) (0.05)
--------- --------- --------- --------- ---------
Total dividends and distributions (1.54) (0.57) (0.53) (0.92) (0.40)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 19.72 $ 17.47 $ 13.58 $ 10.59 $ 11.39
========= ========= ========= ========= =========
TOTAL RETURN+ 23.11% 33.84% 34.61% 0.88% 12.38%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.50% 1.62% 1.62% 1.63% 1.54%
Net investment income 1.04% 1.21% 2.77% 2.52% 3.19%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 23,622 $ 11,210 $ 7,378 $ 6,401 $ 7,860
Portfolio turnover rate 21% 14% 23% 28% 40%
</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) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
22
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED NOVEMBER 30,
-----------------------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
CLASS B SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 17.40 $ 13.53 $ 10.55 $ 11.36 $ 10.49
--------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income++ 0.05 0.07 0.24 0.20 0.27
Net realized and unrealized gain (loss) 3.59 4.26 3.19 (0.17) 0.92
--------- --------- --------- --------- ---------
Total income from investment operations 3.64 4.33 3.43 0.03 1.19
--------- --------- --------- --------- ---------
Less dividends and distributions from:
Net investment income (0.06) (0.07) (0.24) (0.20) (0.27)
Net realized gain (1.34) (0.39) (0.21) (0.64) (0.05)
--------- --------- --------- --------- ---------
Total dividends and distributions (1.40) (0.46) (0.45) (0.84) (0.32)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 19.64 $ 17.40 $ 13.53 $ 10.55 $ 11.36
========= ========= ========= ========= =========
TOTAL RETURN+ 22.18% 32.81% 33.64% 0.15% 11.41%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 2.26% 2.38% 2.37% 2.38% 2.36%
Net investment income 0.28% 0.45% 2.02% 1.77% 2.37%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 95,184 $ 114,483 $ 108,680 $ 95,343 $ 86,479
Portfolio turnover rate 21% 14% 23% 28% 40%
</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) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
23
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED NOVEMBER 30,
-----------------------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
CLASS C SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 17.40 $ 13.53 $ 10.55 $ 11.36 $ 10.50
--------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income++ 0.06 0.06 0.23 0.20 0.27
Net realized and unrealized gain (loss) 3.59 4.27 3.20 (0.17) 0.91
--------- --------- --------- --------- ---------
Total income from investment operations 3.65 4.33 3.43 0.03 1.18
--------- --------- --------- --------- ---------
Less dividends and distributions from:
Net investment income (0.07) (0.07) (0.24) (0.20) (0.27)
Net realized gain (1.34) (0.39) (0.21) (0.64) (0.05)
--------- --------- --------- --------- ---------
Total dividends and distributions (1.41) (0.46) (0.45) (0.84) (0.32)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 19.64 $ 17.40 $ 13.53 $ 10.55 $ 11.36
========= ========= ========= ========= =========
TOTAL RETURN+ 22.24% 32.83% 33.54% 0.15% 11.39%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 2.23% 2.38% 2.37% 2.38% 2.36%
Net investment income 0.31% 0.45% 2.02% 1.77% 2.37%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 15,434 $ 15,261 $ 12,359 $ 9,129 $ 7,504
Portfolio turnover rate 21% 14% 23% 28% 40%
</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) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
24
<Page>
<Table>
<Caption>
FOR THE YEAR ENDED NOVEMBER 30,
-----------------------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
CLASS D SHARES
SELECTED PER SHARE DATA:
Net asset value, beginning of period $ 17.48 $ 13.59 $ 10.59 $ 11.40 $ 10.53
--------- --------- --------- --------- ---------
Income (loss) from investment operations:
Net investment income++ 0.23 0.21 0.34 0.30 0.37
Net realized and unrealized gain (loss) 3.62 4.28 3.22 (0.16) 0.93
--------- --------- --------- --------- ---------
Total income from investment operations 3.85 4.49 3.56 0.14 1.30
--------- --------- --------- --------- ---------
Less dividends and distributions from:
Net investment income (0.24) (0.21) (0.35) (0.31) (0.38)
Net realized gain (1.34) (0.39) (0.21) (0.64) (0.05)
--------- --------- --------- --------- ---------
Total dividends and distributions (1.58) (0.60) (0.56) (0.95) (0.43)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 19.75 $ 17.48 $ 13.59 $ 10.59 $ 11.40
========= ========= ========= ========= =========
TOTAL RETURN+ 23.50% 34.13% 34.92% 1.14% 12.58%
RATIOS TO AVERAGE NET ASSETS(1):
Expenses 1.26% 1.38% 1.37% 1.38% 1.36%
Net investment income 1.28% 1.45% 3.02% 2.77% 3.37%
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands $ 16,017 $ 71,433 $ 58,930 $ 33,652 $ 14,349
Portfolio turnover rate 21% 14% 23% 28% 40%
</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) REFLECTS OVERALL FUND RATIOS FOR INVESTMENT INCOME AND NON-CLASS SPECIFIC
EXPENSES.
SEE NOTES TO FINANCIAL STATEMENTS
25
<Page>
MORGAN STANLEY REAL ESTATE FUND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS AND BOARD OF
TRUSTEES OF MORGAN STANLEY REAL ESTATE FUND:
We have audited the accompanying statement of assets and liabilities of Morgan
Stanley Real Estate Fund (the "Fund"), including the portfolio of investments,
as of November 30, 2005, and the related statements of operations for the year
then ended and changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of November 30, 2005, by correspondence with the
custodian and brokers. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Morgan
Stanley Real Estate Fund as of November 30, 2005, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended, in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche LLP
NEW YORK, NEW YORK
JANUARY 20, 2006
26
<Page>
MORGAN STANLEY REAL ESTATE FUND
TRUSTEE AND OFFICER INFORMATION
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- -------------------------- ----------- ------------ ------------------------------ ------------- ----------------------------
Michael Bozic (64) Trustee Since Private Investor; Director or 197 Director of various business
c/o Kramer Levin Naftalis April 1994 Trustee of the Retail Funds organizations.
& Frankel LLP (since April 1994) and the
Counsel to the Independent Institutional Funds (since
Trustees July 2003); formerly Vice
1177 Avenue of the Chairman of Kmart Corporation
Americas (December 1998-October 2000),
New York, NY 10036 Chairman and Chief Executive
Officer of Levitz Furniture
Corporation (November 1995-
November 1998) and President
and Chief Executive Officer of
Hills Department Stores (May
1991-July 1995); formerly
variously Chairman, Chief
Executive Officer, President
and Chief Operating Officer
(1987-1991) of the Sears
Merchandise Group of Sears,
Roebuck & Co.
Edwin J. Garn (73) Trustee Since Consultant; Director or 197 Director of Franklin Covey
1031 N. Chartwell Court January 1993 Trustee of the Retail Funds (time management systems),
Salt Lake City, UT 84103 (since January 1993) and the BMW Bank of North America,
Institutional Funds (since Inc. (industrial loan
July 2003); member of the Utah corporation), Escrow Bank
Regional Advisory Board of USA (industrial loan
Pacific Corp. (utility corporation), United Space
company); formerly Managing Alliance (joint venture
Director of Summit Ventures between Lockheed Martin and
LLC (2000-2004) (lobbying and the Boeing Company) and
consulting firm); United Nuskin Asia Pacific
States Senator (R-Utah) (multilevel marketing);
(1974-1992) and Chairman, member of the board of
Senate Banking Committee various civic and charitable
(1980-1986), Mayor of Salt organizations.
Lake City, Utah (1971-1974),
Astronaut, Space Shuttle
Discovery (April 12-19, 1985),
and Vice Chairman, Huntsman
Corporation (chemical
company).
Wayne E. Hedien (71) Trustee Since Retired; Director or Trustee 197 Director of The PMI Group
c/o Kramer Levin Naftalis September of the Retail Funds (since Inc. (private mortgage
& Frankel LLP 1997 September 1997) and the insurance); Trustee and Vice
Counsel to the Independent Institutional Funds (since Chairman of The Field Museum
Trustees July 2003); formerly of Natural History; director
1177 Avenue of the associated with the Allstate of various other business
Americas Companies (1966-1994), most and charitable
New York, NY 10036 recently as Chairman of The organizations.
Allstate Corporation (March
1993-December 1994) and
Chairman and Chief Executive
Officer of its whollyowned
subsidiary, Allstate Insurance
Company (July 1989-December
1994).
</Table>
27
<Page>
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- -------------------------- ----------- ------------ ------------------------------ ------------- ----------------------------
Dr. Manuel H. Johnson (56) Trustee Since Senior Partner, Johnson Smick 197 Director of NVR, Inc. (home
c/o Johnson Smick Group, July 1991 International, Inc., a construction); Director of
Inc. consulting firm; Chairman of KFX Energy; Director of RBS
888 16th Street, NW the Audit Committee and Greenwich Capital Holdings
Suite 740 Director or Trustee of the (financial holding company).
Washington, D.C. 20006 Retail Funds (since July 1991)
and the Institutional Funds
(since July 2003); Co-Chairman
and a founder of the Group of
Seven Council (G7C), an
international economic
commission; formerly Vice
Chairman of the Board of
Governors of the Federal
Reserve System and Assistant
Secretary of the U.S.
Treasury.
Joseph J. Kearns (63) Trustee Since President, Kearns & Associates 198 Director of Electro Rent
c/o Kearns & Associates July 2003 LLC (investment consulting); Corporation (equipment
LLC Deputy Chairman of the Audit leasing), The Ford Family
PMB754 Committee and Director or Foundation, and the UCLA
23852 Pacific Coast Trustee of the Retail Funds Foundation.
Highway (since July 2003) and the
Malibu, CA 90265 Institutional Funds (since
August 1994); previously
Chairman of the Audit
Committee of the Institutional
Funds (October 2001-July
2003); formerly CFO of the J.
Paul Getty Trust.
Michael E. Nugent (69) Trustee Since General Partner of Triumph 197
c/o Triumph Capital, L.P. July 1991 Capital, L.P., a private
445 Park Avenue investment partnership;
New York, NY 10022 Chairman of the Insurance
Committee and Director or
Trustee of the Retail Funds
(since July 1991) and the
Institutional Funds (since
July 2001); formerly Vice
President, Bankers Trust
Company and BT Capital
Corporation (1984-1988).
Fergus Reid (73) Trustee Since Chairman of Lumelite Plastics 198 Trustee and Director of
c/o Lumelite Plastics July 2003 Corporation; Chairman of the certain investment companies
Corporation Governance Committee and in the JPMorgan Funds
85 Charles Colman Blvd. Director or Trustee of the complex managed by J.P.
Pawling, NY 12564 Retail Funds (since July 2003) Morgan Investment Management
and the Institutional Funds Inc.
(since June 1992).
</Table>
28
<Page>
INTERESTED TRUSTEES:
<Table>
<Caption>
NUMBER OF
PORTFOLIOS
TERM OF IN FUND
POSITION(S) OFFICE AND COMPLEX
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
INDEPENDENT TRUSTEE REGISTRANT TIME SERVED* DURING PAST 5 YEARS** BY TRUSTEE*** HELD BY TRUSTEE
- -------------------------- ----------- ------------ ------------------------------ ------------- ----------------------------
Charles A. Fiumefreddo Chairman of Since Chairman and Director or 197 None
(72) the Board July 1991 Trustee of the Retail Funds
c/o Morgan Stanley Trust and Trustee (since July 1991) and the
Harborside Financial Institutional Funds (since
Center, July 2003); formerly Chief
Plaza Two, Executive Officer of the
Jersey City, NJ 07311 Retail Funds (until September
2002).
James F. Higgins (57) Trustee Since Director or Trustee of the 197 Director of AXA Financial,
c/o Morgan Stanley Trust June 2000 Retail Funds (since June 2000) Inc. and The Equitable Life
Harborside Financial and the Institutional Funds Assurance Society of the
Center, (since July 2003); Senior United States (financial
Plaza Two, Advisor of Morgan Stanley services).
Jersey City, NJ 07311 (since August 2000); Director
of the Distributor and Dean
Witter Realty Inc.; previously
President and Chief Operating
Officer of the Private Client
Group of Morgan Stanley (May
1999-August 2000), and
President and Chief Operating
Officer of Individual
Securities of Morgan Stanley
(February 1997-May 1999).
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE TRUSTEE BEGAN SERVING THE FUNDS ADVISED BY
MORGAN STANLEY INVESTMENT ADVISORS INC. (THE "INVESTMENT ADVISER") (THE
"RETAIL FUNDS").
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICES AS
DIRECTOR/TRUSTEE FOR THE RETAIL FUNDS AND THE FUNDS ADVISED BY MORGAN
STANLEY INVESTMENT MANAGEMENT INC. AND MORGAN STANLEY AIP GP LP (THE
"INSTITUTIONAL FUNDS") REFLECT THE EARLIEST DATE THE DIRECTOR/TRUSTEE BEGAN
SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE.
*** THE FUND COMPLEX INCLUDES ALL OPEN-END AND CLOSED-END FUNDS (INCLUDING ALL
OF THEIR PORTFOLIOS) ADVISED BY THE INVESTMENT ADVISER AND ANY FUNDS THAT
HAVE AN INVESTMENT ADVISER THAT IS AN AFFILIATED PERSON OF THE INVESTMENT
ADVISER (INCLUDING, BUT NOT LIMITED TO, MORGAN STANLEY INVESTMENT MANAGEMENT
INC.).
29
<Page>
OFFICERS:
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ---------------------------- --------------- --------------- ------------------------------------------------------------
Ronald E. Robison (66) President and Since May 2003 President (since September 2005) and Principal Executive
1221 Avenue of the Americas Principal Officer of funds in the Fund Complex (since May 2003);
New York, NY 10020 Executive Managing Director of Morgan Stanley & Co. Incorporated and
Officer Morgan Stanley; Managing Director and Director of Morgan
Stanley Investment Management Inc., Morgan Stanley
Distribution Inc. and Morgan Stanley Distributors Inc.;
Managing Director, Chief Administrative Officer and Director
of Morgan Stanley Investment Advisors Inc. and Morgan
Stanley Services Company Inc.; Chief Executive Officer and
Director of Morgan Stanley Trust; Director of Morgan Stanley
SICAV (since May 2004); President (since September 2005) and
Principal Executive Officer (since May 2003) of the Van
Kampen Funds; previously, Executive Vice President (July
2003-September 2005) of funds in the Fund Complex and the
Van Kampen Funds. He was also previously President and
Director of the Institutional Funds (March 2001-July 2003),
Chief Global Operations Officer of Morgan Stanley Investment
Management Inc. and Chief Executive Officer and Chairman of
Van Kampen Investor Services.
Joseph J. McAlinden (62) Vice President Since July 1995 Managing Director and Chief Investment Officer of the
1221 Avenue of the Americas Investment Adviser and Morgan Stanley Investment Management
New York, NY 10020 Inc.; Chief Investment Officer of the Van Kampen Funds; Vice
President of the Institutional Funds (since July 2003) and
the Retail Funds (since July 1995).
Barry Fink (50) Vice President Since General Counsel (since May 2000) and Managing Director
1221 Avenue of the Americas February 1997 (since December 2000) of Morgan Stanley Investment
New York, NY 10020 Management; Managing Director (since December 2000),
Secretary (since February 1997) and Director of the
Investment Adviser and the Administrator; Vice President of
the Retail Funds; Assistant Secretary of Morgan Stanley DW;
Vice President of the Institutional Funds (since July 2003);
Managing Director, Secretary and Director of the
Distributor; previously Secretary (February 1997-July 2003)
and General Counsel (February 1997-April 2004) of the Retail
Funds; Vice President and Assistant General Counsel of the
Investment Adviser and the Administrator (February 1997-
December 2001).
Amy R. Doberman (43) Vice President Since July 2004 Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management Inc. and the Investment Adviser, Vice President
of the Institutional and Retail Funds (since July 2004);
Vice President of the Van Kampen Funds (since August 2004);
previously, Managing Director and General Counsel -
Americas, UBS Global Asset Management (July 2000-July 2004)
and General Counsel, Aeltus Investment Management, Inc.
(January 1997-July 2000).
Carsten Otto (41) Chief Since October Executive Director and U.S. Director of Compliance for
1221 Avenue of the Americas Compliance 2004 Morgan Stanley Investment Management (since October 2004);
New York, NY 10020 Officer Executive Director of the Investment Adviser and Morgan
Stanley Investment Management Inc.; formerly Assistant
Secretary and Assistant General Counsel of the Morgan
Stanley Retail Funds.
</Table>
30
<Page>
<Table>
<Caption>
TERM OF
POSITION(S) OFFICE AND
NAME, AGE AND ADDRESS OF HELD WITH LENGTH OF
EXECUTIVE OFFICER REGISTRANT TIME SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS**
- ---------------------------- --------------- --------------- ------------------------------------------------------------
Stefanie V. Chang (39) Vice President Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated,
1221 Avenue of the Americas Morgan Stanley Investment Management Inc. and the Investment
New York, NY 10020 Adviser; Vice President of the Institutional Funds (since
December 1997) and the Retail Funds (since July 2003);
formerly practiced law with the New York law firm of Rogers
& Wells (now Clifford Chance US LLP).
Francis J. Smith (40) Treasurer and Treasurer since Executive Director of the Investment Adviser and the
c/o Morgan Stanley Trust Chief Financial July 2003 and Administration (since December 2001); previously, Vice
Harborside Financial Center, Officer Chief Financial President of the Retail Funds (September 2002-July 2003);
Plaza Two, Officer since Vice President of the Investment Adviser and the
Jersey City, NJ 07311 September 2002 Administrator (August 2000-November 2001).
Thomas F. Caloia (59) Vice President Since July 2003 Executive Director (since December 2002) and Assistant
c/o Morgan Stanley Trust Treasurer of the Investment Adviser, the Distributor and the
Harborside Financial Center, Administrator; previously Treasurer of the Retail Funds
Plaza Two, (April 1989-July 2003); formerly First Vice President of the
Jersey City, NJ 07311 Investment Adviser, the Distributor and the Administrator.
Mary E. Mullin (38) Secretary Since July 2003 Executive Director of Morgan Stanley & Co. Incorporated,
1221 Avenue of the Americas Morgan Stanley Investment Management Inc. and the Investment
New York, NY 10020 Adviser; Secretary of the Institutional Funds (since June
1999) and the Retail Funds (since July 2003); formerly
practiced law with the New York law firms of McDermott, Will
& Emery and Skadden, Arps, Slate, Meagher & Flom LLP.
</Table>
- ----------
* THIS IS THE EARLIEST DATE THE OFFICER BEGAN SERVING THE RETAIL FUNDS. EACH
OFFICER SERVES AN INDEFINITE TERM, UNTIL HIS OR HER SUCCESSOR IS ELECTED.
** THE DATES REFERENCED BELOW INDICATING COMMENCEMENT OF SERVICE AS AN OFFICER
FOR THE RETAIL AND INSTITUTIONAL FUNDS REFLECT THE EARLIEST DATE THE OFFICER
BEGAN SERVING THE RETAIL OR INSTITUTIONAL FUNDS, AS APPLICABLE.
2005 FEDERAL TAX NOTICE (UNAUDITED)
For the fiscal year ended November 30, 2005, 2.13% of the ordinary dividends
paid by the Fund qualified for the dividends received deduction available to
corporations. Additionally, please note that $311,289 of the Fund's ordinary
dividends paid during the fiscal year ended November 30, 2005 qualified for the
lower income tax rate available to individuals under the Jobs and Growth Tax
Relief Reconciliation Act of 2003.
During the fiscal year ended November 30, 2005, the Fund paid to its
shareholders $1.27 per share from long-term capital gains. In addition, Fund
shareholders redeemed $136,807,756 of shares during the fiscal year. Of these
proceeds, approximately $10,000,000 represents long-term capital gains from the
Fund.
31
<Page>
TRUSTEES
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
CHAIRMAN OF THE BOARD
Ronald E. Robison
PRESIDENT and PRINCIPAL EXECUTIVE OFFICER
Joseph J. McAlinden
VICE PRESIDENT
Barry Fink
VICE PRESIDENT
Amy R. Doberman
VICE PRESIDENT
Carsten Otto
CHIEF COMPLIANCE OFFICER
Stefanie V. Chang
VICE PRESIDENT
Francis J. Smith
TREASURER and CHIEF FINANCIAL OFFICER
Thomas F. Caloia
VICE PRESIDENT
Mary E. Mullin
SECRETARY
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
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
(C) 2005 Morgan Stanley
[MORGAN STANLEY LOGO]
[GRAPHIC]
MORGAN STANLEY FUNDS
MORGAN STANLEY
REAL ESTATE FUND
ANNUAL REPORT
NOVEMBER 30, 2005
[MORGAN STANLEY LOGO]
36068RPT-RA06-0030P-Y11/05
<Page>
Item 2. Code of Ethics.
(a) The Fund has adopted a code of ethics (the "Code of Ethics") that applies
to its principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the Fund or a third
party.
(b) No information need be disclosed pursuant to this paragraph.
(c) The Fund has amended its Code of Ethics during the period covered by the
shareholder report presented in Item 1 hereto to delete from the end of the
following paragraph on page 2 of the Code the phrase "to the detriment of the
Fund.":
"Each Covered Officer must not use his personal influence or personal
relationship improperly to influence investment decisions or financial reporting
by the Fund whereby the Covered Officer would benefit personally (directly or
indirectly)."
Additionally, Exhibit B was amended to remove Mitchell M. Merin as a covered
officer.
(d) Not applicable.
(e) Not applicable.
(f)
(1) The Fund's Code of Ethics is attached hereto as Exhibit A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Fund's Board of Trustees has determined that it has two "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees: Dr. Manuel H. Johnson and Joseph J. Kearns. Under
applicable securities laws, a person who is determined to be an audit committee
financial expert will not be deemed an "expert" for any purpose, including
without limitation for the purposes of Section 11 of the Securities Act of 1933,
as a result of being designated or identified as an audit committee financial
expert. The designation or identification of a person as an audit committee
financial expert does not impose on such person any duties, obligations, or
liabilities that are greater than the duties, obligations, and liabilities
imposed on such person as a member of the audit committee and Board of Trustees
in the absence of such designation or identification.
<Page>
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2005
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 30,448 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 540(2) $ -(2)
TAX FEES $ 5,998(3) $ -(4)
ALL OTHER FEES $ - $ -
TOTAL NON-AUDIT FEES $ 6,538 $
TOTAL $ 36,986 $
</Table>
2004
<Table>
<Caption>
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES $ 29,002 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES $ 452(2) $ 3,746,495(2)
TAX FEES $ 5,915(3) $ 79,800(4)
ALL OTHER FEES $ - $ -(5)
TOTAL NON-AUDIT FEES $ 6,367 $ 3,826,295
TOTAL $ 35,369 $ 3,826,295
</Table>
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors)
and any entity controlling, controlled by or under common
control with the Adviser that provides ongoing services to the
Registrant.
(2) Audit-Related Fees represent assurance and related services
provided that are reasonably related to the performance of the
audit of the financial statements of the Covered Entities' and
funds advised by the Adviser or its affiliates, specifically
data verification and agreed-upon procedures related to asset
securitizations and agreed-upon procedures engagements.
(3) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the preparation and
review of the Registrant's tax returns.
(4) Tax Fees represent tax compliance, tax planning and tax advice
services provided in connection with the review of Covered
Entities' tax returns.
(5) All other fees represent project management for future
business applications and improving business and operational
processes.
<Page>
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
APPENDIX A
AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
MORGAN STANLEY RETAIL AND INSTITUTIONAL FUNDS
AS ADOPTED AND AMENDED JULY 23, 2004,(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.
The SEC has issued rules specifying the types of services that an independent
auditor may not provide to its audit client, as well as the audit committee's
administration of the engagement of the independent auditor. The SEC's rules
establish two different approaches to pre-approving services, which the SEC
considers to be equally valid. Proposed services either: may be pre-approved
without consideration of specific case-by-case services by the Audit Committee
("GENERAL PRE-APPROVAL"); or require the specific pre-approval of the Audit
Committee or its delegate ("SPECIFIC PRE-APPROVAL"). The Audit Committee
believes that the combination of these two approaches in this Policy will result
in an effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
The appendices to this Policy describe the Audit, Audit-related, Tax and All
Other services that have the general pre-approval of the Audit Committee. The
term of any general pre-approval is 12 months from the date of pre-approval,
unless the Audit Committee considers and provides a different period and states
otherwise. The Audit Committee will annually review and pre-approve the services
that may be provided by the Independent Auditors without obtaining specific
pre-approval from the Audit Committee. The Audit Committee will add to or
subtract from the list of general pre-approved services from time to time, based
on subsequent determinations.
- ----------
(1) This Audit Committee Audit and Non-Audit Services Pre-Approval Policy and
Procedures (the "POLICY"), adopted as of the date above, supersedes and
replaces all prior versions that may have been adopted from time to time.
<Page>
The purpose of this Policy is to set forth the policy and procedures by which
the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes that
implementation of the Policy will not adversely affect the Independent Auditors'
independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may delegate
either type of pre-approval authority to one or more of its members. The member
to whom such authority is delegated must report, for informational purposes
only, any pre-approval decisions to the Audit Committee at its next scheduled
meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the specific
pre-approval of the Audit Committee. Audit services include the annual financial
statement audit and other procedures required to be performed by the Independent
Auditors to be able to form an opinion on the Fund's financial statements. These
other procedures include information systems and procedural reviews and testing
performed in order to understand and place reliance on the systems of internal
control, and consultations relating to the audit. The Audit Committee will
approve, if necessary, any changes in terms, conditions and fees resulting from
changes in audit scope, Fund structure or other items.
In addition to the annual Audit services engagement approved by the Audit
Committee, the Audit Committee may grant general pre-approval to other Audit
services, which are those services that only the Independent Auditors reasonably
can provide. Other Audit services may include statutory audits and services
associated with SEC registration statements (on Forms N-1A, N-2, N-3, N-4,
etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the Audit services in Appendix B.1. All
other Audit services not listed in Appendix B.1 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
4. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are reasonably
related to the performance of the audit or review of the Fund's financial
statements and, to the extent they are Covered Services, the Covered Entities or
that are traditionally performed by the Independent Auditors. Because the Audit
Committee believes that the provision of Audit-related services does not impair
the independence of the auditor and is consistent with the SEC's rules on
auditor independence, the Audit Committee may grant general pre-approval to
Audit-related services. Audit-related services include, among others, accounting
consultations related to accounting, financial reporting or disclosure matters
<Page>
not classified as "Audit services"; assistance with understanding and
implementing new accounting and financial reporting guidance from rulemaking
authorities; agreed-upon or expanded audit procedures related to accounting
and/or billing records required to respond to or comply with financial,
accounting or regulatory reporting matters; and assistance with internal control
reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the Audit-related services in Appendix B.2.
All other Audit-related services not listed in Appendix B.2 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide Tax
services to the Fund and, to the extent they are Covered Services, the Covered
Entities, such as tax compliance, tax planning and tax advice without impairing
the auditor's independence, and the SEC has stated that the Independent Auditors
may provide such services.
Pursuant to the preceding paragraph, the Audit Committee has pre-approved the
Tax Services in Appendix B.3. All Tax services in Appendix B.3 must be
specifically pre-approved by the Audit Committee (or by any member of the Audit
Committee to which pre-approval has been delegated).
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the All Other services in Appendix B.4.
Permissible All Other services not listed in Appendix B.4 must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated).
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be provided by
the Independent Auditors will be established annually by the Audit Committee.
Any proposed services exceeding these levels or amounts will require specific
pre-approval by the Audit Committee. The Audit Committee is mindful of the
overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services.
8. PROCEDURES
All requests or applications for services to be provided by the Independent
Auditors that do not require specific approval by the Audit Committee will be
submitted to the Fund's Chief Financial Officer and must include a detailed
description of the services to be
<Page>
rendered. The Fund's Chief Financial Officer will determine whether such
services are included within the list of services that have received the general
pre-approval of the Audit Committee. The Audit Committee will be informed on a
timely basis of any such services rendered by the Independent Auditors. Requests
or applications to provide services that require specific approval by the Audit
Committee will be submitted to the Audit Committee by both the Independent
Auditors and the Fund's Chief Financial Officer, and must include a joint
statement as to whether, in their view, the request or application is consistent
with the SEC's rules on auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer to monitor
the performance of all services provided by the Independent Auditors and to
determine whether such services are in compliance with this Policy. The Fund's
Chief Financial Officer will report to the Audit Committee on a periodic basis
on the results of its monitoring. Both the Fund's Chief Financial Officer and
management will immediately report to the chairman of the Audit Committee any
breach of this Policy that comes to the attention of the Fund's Chief Financial
Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an annual
basis to meet its responsibility to oversee the work of the Independent Auditors
and to assure the auditor's independence from the Fund, such as reviewing a
formal written statement from the Independent Auditors delineating all
relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any entity
controlling, controlled by or under common control with the Fund's investment
adviser(s) that provides ongoing services to the Fund(s). Beginning with
non-audit service contracts entered into on or after May 6, 2003, the Fund's
audit committee must pre-approve non-audit services provided not only to the
Fund but also to the Covered Entities if the engagements relate directly to the
operations and financial reporting of the Fund. This list of Covered Entities
would include:
MORGAN STANLEY RETAIL FUNDS
Morgan Stanley Investment Advisors Inc.
Morgan Stanley & Co. Incorporated
Morgan Stanley DW Inc.
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Van Kampen Asset Management
Morgan Stanley Services Company, Inc.
Morgan Stanley Distributors Inc.
Morgan Stanley Trust FSB
<Page>
MORGAN STANLEY INSTITUTIONAL FUNDS
Morgan Stanley Investment Management Inc.
Morgan Stanley Investment Advisors Inc.
Morgan Stanley Investment Management Limited
Morgan Stanley Investment Management Private Limited
Morgan Stanley Asset & Investment Trust Management Co., Limited
Morgan Stanley Investment Management Company
Morgan Stanley & Co. Incorporated
Morgan Stanley Distribution, Inc.
Morgan Stanley AIP GP LP
Morgan Stanley Alternative Investment Partners LP
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
(a) The Fund has a separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act whose members are:
Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Manual H. Johnson, Joseph J.
Kearns, Michael Nugent and Fergus Reid.
(b) Not applicable.
Item 6. Schedule of Investments
Refer to Item 1.
<Page>
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Applicable only to reports filed by closed-end funds.
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 only 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 registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12. Exhibits
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(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.
<Page>
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
January 19, 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
January 19, 2006
/s/ Francis Smith
Francis Smith
Principal Financial Officer
January 19, 2006