-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RoHYQ3LYaXiMjgs96xc84hTz++KwLZYXr113yQiGVHD1DRX0ocY0YWNIjTdR0BZi Wy/Ye7d35R7EI3EBoMa64Q== 0000950123-08-009290.txt : 20080811 0000950123-08-009290.hdr.sgml : 20080811 20080811155402 ACCESSION NUMBER: 0000950123-08-009290 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20080531 FILED AS OF DATE: 20080811 DATE AS OF CHANGE: 20080811 EFFECTIVENESS DATE: 20080811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGAN STANLEY REAL ESTATE FUND CENTRAL INDEX KEY: 0001074111 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-09117 FILM NUMBER: 081006159 BUSINESS ADDRESS: STREET 1: 522 FIFTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10036 BUSINESS PHONE: 800-869-6397 MAIL ADDRESS: STREET 1: 522 FIFTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10036 FORMER COMPANY: FORMER CONFORMED NAME: MORGAN STANLEY DEAN WITTER REAL ESTATE FUND DATE OF NAME CHANGE: 19981120 0001074111 S000002369 Morgan Stanley Real Estate Fund C000006243 A REFAX C000006244 B REFBX C000006245 C REFCX C000006246 I REFDX N-CSRS 1 y60281nvcsrs.txt FORM N-CSRS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-09117 Morgan Stanley Real Estate Fund (Exact name of registrant as specified in charter) 522 Fifth Avenue, New York, New York 10036 (Address of principal executive offices) (Zip code) Ronald E. Robison 522 Fifth Avenue, New York, New York 10036 (Name and address of agent for service) Registrant's telephone number, including area code: 212-296-6990 Date of fiscal year end: November 30, 2008 Date of reporting period: May 31, 2008 Item 1 - Report to Shareholders Welcome, Shareholder: In this report, you'll learn about how your investment in Morgan Stanley Real Estate Fund performed during the semiannual period. We will provide an overview of the market conditions, and discuss some of the factors that affected performance during the reporting period. In addition, this report includes the Fund's financial statements and a list of Fund investments. THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE FUND BEING OFFERED. MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THIS FUND. PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE INFORMATION ON INVESTMENT RISKS. FUND REPORT For the six months ended May 31, 2008 TOTAL RETURN FOR THE 6 MONTHS ENDED MAY 31, 2008
FTSE LIPPER NAREIT REAL EQUITY ESTATE REITS S&P FUNDS CLASS A CLASS B CLASS C CLASS I(+) INDEX(1) 500(R)(2) INDEX(3) 1.69% 1.28% 1.46% 1.84% 2.73% -4.47% 4.12%
+ Formerly Class D shares. Renamed Class I shares effective March 31, 2008. The performance of the Fund's four share classes varies because each has different expenses. The Fund's total returns assume the reinvestment of all distributions but do not reflect the deduction of any applicable sales charges. Such costs would lower performance. See Performance Summary for standardized performance and benchmark information. MARKET CONDITIONS The real estate investment trust (REIT) market gained 2.7 percent in the six- month period under review, as measured by the FTSE NAREIT Equity REITs Index. Although the results reflect a modest gain, there was tremendous volatility in the period. Declines through February reflected concerns over the continued deterioration of the credit markets, a weaker outlook for the economy and heightened concerns over the prospect for even greater-than-expected declines in asset values. The rally from March through May appeared to coincide with a rally in the broader equity markets, and particularly financial stocks, as investors regained confidence in the financial markets. Among the major U.S. REIT sectors, apartment stocks significantly outperformed, office stocks modestly outperformed and retail stocks significantly underperformed the FTSE NAREIT Equity REITs Index. The apartment sector appeared to benefit from continued private market transaction activity, which confirmed that stocks in the sector were trading at significant discounts to underlying asset values. In addition, investors became more attuned to the unique availability of attractive financing from government agencies specifically in this sector versus the rest of the real estate market. Finally, given the wide disparity between public and private market valuations, the sector benefited from plans by most of the apartment companies to continue to sell assets and buy back stock in 2008. In the office sector, the potential for a slowdown in tenant demand due to a weaker economy was offset by strong recoveries in share price from a wide variety of office companies, including both owners of urban and suburban assets, which bounced back from underperformance earlier in the period. The retail sector significantly underperformed as investors appeared concerned with the prospect of a slowdown in consumer spending. These concerns were further fueled by a related pullback in retailer expansion plans, which together with increased levels of new supply could begin to have a negative impact on underlying real estate fundamentals and asset values for the sector. Among the smaller sectors, the storage and health care REITs significantly outperformed and the industrial and hotel REITs significantly underperformed the index. PERFORMANCE ANALYSIS All share classes of Morgan Stanley Real Estate Fund underperformed the FTSE NAREIT Equity REITs Index and the Lipper Real Estate Funds Index, and outperformed the S&P 500(R) for the six months ended May 31, 2008, assuming no deduction of applicable sales charges. Bottom-up stock selection was favorable but was offset by sector allocation which detracted from performance for the period. Stock selection was strong in the mall and mixed office/industrial sectors; 2 this was partially offset by stock selection in the health care sector. From a top-down perspective, the Fund benefited from the overweight in the apartment sector and the underweight in the industrial sector; this was offset by the overweight in the hotel sector. During the period, we have maintained our core investment philosophy as a real estate value investor. We remained focused on stocks whose share prices, in our view, provide real estate exposure at the best valuation relative to their underlying asset values. We believe the standstill of private market transaction activity in several sectors has directly contributed to pricing inefficiencies in the public real estate securities market that are greater than we have observed in recent years. In this environment, we have favored stocks whose share prices we believe already more than reflect prospective declines in underlying values. Our company-specific research led us to an overweighting to a group of companies that are focused in the ownership of upscale urban hotels and apartment properties, and an underweighting in companies concentrated in the ownership of industrial properties, strip shopping centers, health care and storage assets. There is no guarantee that any sectors mentioned will continue to perform as discussed herein or that securities in such sectors will be held by the Fund in the future.
TOP 10 HOLDINGS AS OF 05/31/08 Simon Property Group, Inc. 8.7% Equity Residential 7.3 AvalonBay Communities, Inc. 6.7 Host Hotels & Resorts Inc. 5.6 Starwood Hotels & Resorts Worldwide, Inc. 5.2 Brookfield Properties Corp. (Canada) 5.1 Boston Properties, Inc. 5.1 Vornado Realty Trust 4.5 Regency Centers Corp. 4.1 Macerich Co. (The) 3.6
PORTFOLIO COMPOSITION AS OF 05/31/08 Common Stocks 96.6% Short-Term Paper 3.4
Subject to change daily. Provided for informational purposes only and should not be deemed as a recommendation to buy or sell the securities mentioned above. Top 10 holdings are as a percentage of net assets and portfolio composition are as a percentage of total investments. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services. 3 INVESTMENT STRATEGY THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN INCOME PRODUCING COMMON STOCKS AND OTHER EQUITY SECURITIES (WHICH MAY INCLUDE CONVERTIBLE SECURITIES) OF COMPANIES THAT ARE PRINCIPALLY ENGAGED IN THE U.S. REAL ESTATE INDUSTRY. A COMPANY IS CONSIDERED TO BE "PRINCIPALLY ENGAGED" IN THE U.S. REAL ESTATE INDUSTRY IF (I) IT DERIVES AT LEAST 50 PERCENT OF ITS REVENUES OR PROFITS FROM THE OWNERSHIP, LEASING, CONSTRUCTION, MANAGEMENT, DEVELOPMENT, FINANCING OR SALE OF RESIDENTIAL, COMMERCIAL OR INDUSTRIAL REAL ESTATE; OR (II) IT HAS AT LEAST 50 PERCENT OF THE VALUE OF ITS ASSETS INVESTED IN U.S. RESIDENTIAL, COMMERCIAL OR INDUSTRIAL REAL ESTATE. COMPANIES PRIMARILY ENGAGED IN THE REAL ESTATE INDUSTRY MAY INCLUDE REAL ESTATE INVESTMENT TRUSTS KNOWN AS "REITS," WHICH POOL INVESTOR FUNDS MOSTLY FOR INVESTMENT IN COMMERCIAL REAL ESTATE PROPERTIES. THEY ALSO MAY INCLUDE, AMONG OTHER BUSINESSES, REAL ESTATE DEVELOPERS, BROKERS AND OPERATING COMPANIES, AS WELL AS COMPANIES WHOSE PRODUCTS AND SERVICES ARE SIGNIFICANTLY RELATED TO THE REAL ESTATE INDUSTRY. IN DECIDING WHICH SECURITIES TO BUY, HOLD OR SELL, THE FUND'S "INVESTMENT ADVISER," MORGAN STANLEY INVESTMENT ADVISORS INC., CONSIDERS MARKET, ECONOMIC AND POLITICAL FACTORS. FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND AND FOURTH FISCAL QUARTERS. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM N-CSRS AND FORM N-CSR, RESPECTIVELY. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE SEC'S WEB SITE, HTTP://WWW.SEC.GOV. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD YOU MAY OBTAIN A COPY OF THE FUND'S PROXY VOTING POLICY AND PROCEDURES WITHOUT CHARGE, UPON REQUEST, BY CALLING TOLL FREE (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT WWW.MORGANSTANLEY.COM. IT IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV. YOU MAY OBTAIN INFORMATION REGARDING HOW THE FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT TWELVE-MONTH PERIOD ENDED JUNE 30 WITHOUT CHARGE BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT WWW.MORGANSTANLEY.COM. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV. 4 HOUSEHOLDING NOTICE TO REDUCE PRINTING AND MAILING COSTS, THE FUND ATTEMPTS TO ELIMINATE DUPLICATE MAILINGS TO THE SAME ADDRESS. THE FUND DELIVERS A SINGLE COPY OF CERTAIN SHAREHOLDER DOCUMENTS, INCLUDING SHAREHOLDER REPORTS, PROSPECTUSES AND PROXY MATERIALS, TO INVESTORS WITH THE SAME LAST NAME WHO RESIDE AT THE SAME ADDRESS. YOUR PARTICIPATION IN THIS PROGRAM WILL CONTINUE FOR AN UNLIMITED PERIOD OF TIME UNLESS YOU INSTRUCT US OTHERWISE. YOU CAN REQUEST MULTIPLE COPIES OF THESE DOCUMENTS BY CALLING (800) 869-NEWS, 8:00 A.M. TO 8:00 P.M., ET. ONCE OUR CUSTOMER SERVICE CENTER HAS RECEIVED YOUR INSTRUCTIONS, WE WILL BEGIN SENDING INDIVIDUAL COPIES FOR EACH ACCOUNT WITHIN 30 DAYS. 5 PERFORMANCE SUMMARY AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED MAY 31, 2008
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES+ CLASS I SHARES++ (since 04/28/99) (since 04/28/99) (since 04/28/99) (since 04/28/99) SYMBOL REFAX REFBX REFCX REFDX 1 YEAR (14.73)%(4) (15.39)%(4) (15.21)%(4) (14.52)%(4) (19.21) (5) (18.08) (5) (15.75) (5) -- 5 YEARS 19.53 (4) 18.62 (4) 18.68 (4) 19.82 (4) 18.24 (5) 18.45 (5) 18.68 (5) -- SINCE INCEPTION 14.88 (4) 14.10 (4) 14.02 (4) 15.18 (4) 14.20 (5) 14.10 (5) 14.02 (5) --
Performance data quoted represents past performance, which is no guarantee of future results and current performance may be lower or higher than the figures shown. For most recent month-end performance figures, please visit www.morganstanley.com/msim or speak with your Financial Advisor. Investment returns and principal value will fluctuate and fund shares, when redeemed, may be worth more or less than their original cost. The table does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance for Class A, Class B, Class C, and Class I shares will vary due to differences in sales charges and expenses. * The maximum front-end sales charge for Class A is 5.25%. ** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The CDSC declines to 0% after six years. Effective April 2005, Class B shares will generally convert to Class A shares approximately eight years after the end of the calendar month in which the shares were purchased. Performance for periods greater than eight years reflects this conversion. + The maximum contingent deferred sales charge for Class C is 1.0% for shares redeemed within one year of purchase. ++ Class I (formerly Class D) has no sales charge. (1) The FTSE NAREIT Equity REITs Index measures the performance of real estate securities, which will fluctuate with changes in the values of their underlying properties. The Index is a benchmark of real estate investment trusts compiled by the National Association of Real Estate Investment Trusts. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. (2) The Standard & Poor's 500(R) Index (S&P 500(R)) is a broad-based index, the performance of which is based on the performance of 500 widely-held common stocks chosen for market size, liquidity and industry group representation. The Index is unmanaged and its returns do not include any sales charges or fees. Such costs would lower performance. It is not possible to invest directly in an index. (3) The Lipper Real Estate Funds Index is an equally weighted performance index of the largest qualifying funds (based on net assets) in the Lipper Real Estate Funds classification. The Index, which is adjusted for capital gains distributions and income dividends, is unmanaged and should not be considered an investment. There are currently 30 funds represented in this Index. The Fund is in the Lipper Real Estate Funds classification as of the date of this report. (4) Figure shown assumes reinvestment of all distributions and does not reflect the deduction of any sales charges. (5) Figure shown assumes reinvestment of all distributions and the deduction of the maximum applicable sales charge. See the Fund's current prospectus for complete details on fees and sales charges. 6 EXPENSE EXAMPLE As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments and redemption fees; and (2) ongoing costs, including advisory fees; distribution and service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period 12/01/07 - 05/31/08. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing cost of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads) and redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs, and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
BEGINNING ENDING EXPENSES PAID ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD@ ------------- ------------- -------------- 12/01/07 - 12/01/07 05/31/08 05/31/08 ------------- ------------- -------------- CLASS A Actual (1.69% return)......................... $1,000.00 $1,016.90 $ 8.27 Hypothetical (5% annual return before expenses)................................... $1,000.00 $1,016.80 $ 8.27 CLASS B Actual (1.28% return)......................... $1,000.00 $1,012.80 $12.13 Hypothetical (5% annual return before expenses)................................... $1,000.00 $1,012.95 $12.13 CLASS C Actual (1.46% return)......................... $1,000.00 $1,014.60 $10.83 Hypothetical (5% annual return before expenses)................................... $1,000.00 $1,014.25 $10.83 CLASS I@@ Actual (1.84% return)......................... $1,000.00 $1,018.40 $ 7.11 Hypothetical (5% annual return before expenses)................................... $1,000.00 $1,017.95 $ 7.11
- --------- @ Expenses are equal to the Fund's annualized expense ratios of 1.64%, 2.41%, 2.15% and 1.41% for Class A, Class B, Class C and Class I shares, respectively, multiplied by the average account value over the period, multiplied by 183/366 (to reflect the one-half year period). @@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008. 7 Morgan Stanley Real Estate Fund PORTFOLIO OF INVESTMENTS - MAY 31, 2008 (UNAUDITED)
NUMBER OF SHARES VALUE - ------------------------------------------------------------------- Common Stocks (97.7%) Diversified (6.5%) 38,805 Forest City Enterprises, Inc. (Class A)..................................... $ 1,552,200 35,650 Vornado Realty Trust - REIT............. 3,484,075 ----------- 5,036,275 ----------- Health Care (5.8%) 66,092 Assisted Living Concepts, Inc. (a)...... 442,816 37,530 Brookdale Senior Living................. 990,041 7,500 Care Investment Trust Inc. - REIT....... 86,175 3,360 Extendicare Real Estate Investment (Canada) - REIT........................ 32,937 37,995 Healthcare Realty Trust, Inc. - REIT.... 1,008,767 85,730 Senior Housing Properties Trust - REIT.. 1,904,063 610 Ventas, Inc. - REIT..................... 29,073 ----------- 4,493,872 ----------- Industrial (4.8%) 28,970 AMB Property Corp. - REIT............... 1,707,492 9,250 DCT Industrial Trust, Inc. - REIT....... 90,187 31,855 ProLogis - REIT......................... 1,972,780 ----------- 3,770,459 ----------- Industrial/Office (3.6%) 41,270 Duke Realty Corp. ...................... 1,059,814 36,083 Liberty Property Trust - REIT........... 1,280,947 8,343 PS Business Parks, Inc. (Class A) - REIT.............................. 479,723 ----------- 2,820,484 ----------- Lodging/Resorts (14.2%) 55,159 Hersha Hospitality Trust - REIT......... 524,562 252,894 Host Hotels & Resorts Inc. - REIT....... 4,347,248 52,844 Morgans Hotel Group Co. (a)............. 680,102 83,256 Starwood Hotels & Resorts Worldwide, Inc. .................................. 4,029,590 108,729 Strategic Hotels & Resorts, Inc. - REIT............................ 1,495,024 ----------- 11,076,526 ----------- Office (15.2%) 40,462 Boston Properties, Inc. - REIT.......... 3,954,756 199,238 Brookfield Properties Corp. (Canada).... 4,006,676 22,031 Douglas Emmett Inc. - REIT.............. 539,759 9,832 Kilroy Realty Corp. - REIT.............. 536,041 70,652 Mack-Cali Realty Corp. - REIT........... 2,729,993 2,037 Parkway Properties, Inc. - REIT......... 77,447 ----------- 11,844,672 ----------- Residential Apartments (18.4%) 51,348 AvalonBay Communities, Inc. - REIT...... 5,196,417 24,596 Camden Property Trust - REIT........... 1,211,599 133,938 Equity Residential - REIT............... 5,664,238 4,927 Essex Property Trust, Inc. - REIT....... 588,629 33,420 GMH Communities Trust - REIT............ 245,303 39,740 Post Properties, Inc. - REIT............ 1,411,167 ----------- 14,317,353 ----------- Residential Manufactured Homes (1.7%) 26,896 Equity Lifestyle Properties, Inc. - REIT............................ 1,336,462 ----------- Retail Regional Malls (14.9%) 31,057 General Growth Properties, Inc. - REIT.. 1,290,729 38,977 Macerich Co. (The) - REIT............... 2,788,025 68,249 Simon Property Group, Inc. - REIT....... 6,781,221 13,716 Taubman Centers, Inc. - REIT............ 737,235 ----------- 11,597,210 ----------- Retail Strip Centers (7.6%) 34,810 Acadia Realty Trust - REIT.............. 861,199 106,300 BPP Liquidating Trust - REIT (a)(b)..... 0 1,413 Equity One, Inc. - REIT................. 32,796 17,869 Federal Realty Investment Trust - REIT.. 1,440,599 15,650 Ramco-Gershenson Properties Trust - REIT........................... 349,778 48,558 Regency Centers Corp. - REIT............ 3,228,621 ----------- 5,912,993 -----------
See Notes to Financial Statements 8 Morgan Stanley Real Estate Fund PORTFOLIO OF INVESTMENTS - MAY 31, 2008 (UNAUDITED) continued
NUMBER OF SHARES VALUE - ------------------------------------------------------------------- Self Storage (3.0%) 19,464 Public Storage, Inc. - REIT............. $ 1,715,362 13,797 Sovran Self Storage, Inc. - REIT........ 609,689 ----------- 2,325,051 ----------- Specialty (2.0%) 34,090 Plum Creek Timber Co., Inc. - REIT...... 1,590,299 ----------- Total Common Stocks (Cost $47,836,230)...................... 76,121,656 ----------- NUMBER OF SHARES (000) - ------------ Short-Term Investment (3.5%) Investment Company (c) 2,684 Morgan Stanley Institutional Liquidity Money Market Portfolio - Institutional Class (Cost $2,683,736)...................... 2,683,736 -----------
Total Investments (Cost $50,519,966) (d)..................... 101.2% 78,805,392 Liabilities In Excess of Other Assets...... (1.2) (923,300) ----- ----------- Net Assets................................. 100.0% $77,882,092 ===== ===========
- ---------- REIT Real Estate Investment Trust. (a) Non-income producing security. (b) A security with a total market value equal to $0 has been valued at its fair value as determined in good faith under procedures established by and under the general supervision of the Fund's Trustees. (c) See note 4 to the financial statements regarding investments in Morgan Stanley Institutional Liquidity Money Market Portfolio- Institutional class. (d) The aggregate cost for federal income tax purposes approximates the aggregate cost for book purposes. The aggregate gross unrealized appreciation is $30,208,163 and the aggregate gross unrealized depreciation is $1,922,737, resulting in net unrealized appreciation of $28,285,426.
PERCENT OF TOTAL INDUSTRY VALUE INVESTMENTS - ------------------------------------------------- Residential Apartment........... $14,317,353 18.2% Office................ 11,844,672 15.0 Retail Regional Malls............... 11,597,210 14.7 Lodging/Resorts....... 11,076,526 14.1 Retail Strip Centers.. 5,912,993 7.5 Diversified........... 5,036,275 6.4 Industrial............ 3,770,459 4.8 Health Care........... 4,493,872 5.7 Industrial/Office..... 2,820,484 3.6 Investment Company.... 2,683,736 3.4 Self Storage.......... 2,325,051 2.9 Specialty............. 1,590,299 2.0 Residential Manufactured Homes.. 1,336,462 1.7 ----------- ----- $78,805,392 100.0% =========== =====
See Notes to Financial Statements 9 Morgan Stanley Real Estate Fund FINANCIAL STATEMENTS Statement of Assets and Liabilities May 31, 2008 (unaudited) Assets: Investments in securities, at value (cost $47,836,230)...... $76,121,656 Investment in affiliate, at value (cost $2,683,736)....... 2,683,736 Receivable for: Dividends.................... 109,369 Investments sold............. 13,799 Shares of beneficial interest sold.......................... 11,981 Dividends from affiliate..... 6,375 Prepaid expenses and other assets........................ 53,185 ----------- Total Assets................. 79,000,101 ----------- Liabilities: Payable for: Shares of beneficial interest redeemed...................... 130,149 Investment advisory fee...... 53,432 Distribution fee............. 39,493 Transfer agent fee........... 8,191 Administration fee........... 5,388 Payable to bank................. 811,625 Accrued expenses and other payables...................... 69,731 ----------- Total Liabilities............ 1,118,009 ----------- Net Assets................... $77,882,092 =========== Composition of Net Assets: Paid-in-capital................. $41,360,219 Net unrealized appreciation..... 28,285,426 Accumulated undistributed net investment income............. 756,189 Accumulated undistributed net realized gain................. 7,480,258 ----------- Net Assets................... $77,882,092 =========== Class A Shares: Net Assets...................... $34,134,186 Shares Outstanding (unlimited authorized, $.01 par value)... 3,603,276 Net Asset Value Per Share.... $9.47 ===== Maximum Offering Price Per Share, (net assets value plus 5.54% of net asset value).......... $9.99 ===== Class B Shares: Net Assets...................... $27,339,839 Shares Outstanding (unlimited authorized, $.01 par value)... 2,907,228 Net Asset Value Per Share.... $9.40 ===== Class C Shares: Net Assets...................... $ 9,598,708 Shares Outstanding (unlimited authorized, $.01 par value)... 1,021,321 Net Asset Value Per Share.... $9.40 ===== Class I Shares@@: Net Assets...................... $ 6,809,359 Shares Outstanding (unlimited authorized, $.01 par value)... 716,818 Net Asset Value Per Share.... $9.50 =====
- ---------- @@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008. Statement of Operations For the six months ended May 31, 2008 (unaudited) Net Investment Income: Income Dividends (net of $9,022 foreign withholding tax).............. $ 2,171,919 Dividends from affiliate........ 38,586 ----------- Total Income................. 2,210,505 ----------- Expenses Investment advisory fee......... 323,462 Distribution fee (Class A shares)....................... 39,988 Distribution fee (Class B shares)....................... 147,543 Distribution fee (Class C shares)....................... 36,406 Transfer agent fees and expenses...................... 75,832 Shareholder reports and notices....................... 37,713 Administration fee.............. 32,346 Professional fees............... 25,815 Registration fees............... 22,128 Custodian fees.................. 9,796 Trustees' fees and expenses..... 1,222 Other........................... 41,662 ----------- Total Expenses............... 793,913 Less: expense offset............ (328) Less: rebate from Morgan Stanley affiliate cash sweep (Note 4)............................ (1,107) ----------- Net Expenses................. 792,478 ----------- Net Investment Income........ 1,418,027 ----------- Realized and Unrealized Gain (Loss): Realized Gain (Loss) on: Investments..................... 6,119,309 Foreign exchange transactions... (371) ----------- Net Realized Gain............ 6,118,938 Net Change in Unrealized Appreciation/Depreciation on Investments................... (7,256,219) ----------- Net Loss..................... (1,137,281) ----------- Net Increase.................... $ 280,746 ===========
See Notes to Financial Statements 10 Morgan Stanley Real Estate Fund FINANCIAL STATEMENTS continued Statements of Changes in Net Assets
FOR THE SIX FOR THE YEAR MONTHS END ENDED MAY 31, 2008 NOVEMBER 30, 2007 ------------ ----------------- (unaudited) Increase (Decrease) in Net Assets: Operations: Net investment income............................... $ 1,418,027 $ 643,908 Net realized gain................................... 6,118,938 34,704,175 Net change in unrealized appreciation/depreciation.. (7,256,219) (50,836,202) ------------ ------------ Net Increase (Decrease).......................... 280,746 (15,488,119) ------------ ------------ Dividends and Distributions to Shareholders from: Net investment income Class A shares................................... (343,196) (520,100)(++) Class B shares................................... (167,614) (204,060)(++) Class C shares................................... (68,125) (58,110)(++) Class I shares@@................................. (81,960) (186,050)(++) Net realized gain Class A shares................................... (13,498,465) (6,150,182) Class B shares................................... (12,200,210) (15,450,360) Class C shares................................... (3,857,917) (3,282,848) Class I shares@@................................. (2,943,413) (2,503,180) ------------ ------------ Total Dividends and Distributions................ (33,160,900) (28,354,890) ------------ ------------ Net increase (decrease) from transactions in shares of beneficial interest............................ 12,866,016 (25,506,539) ------------ ------------ Net Decrease..................................... (20,014,138) (69,349,548) Net Assets: Beginning of period................................. 97,896,230 167,245,778 ------------ ------------ End of Period (Including accumulated undistributed net investment income of $756,189 and dividends in excess of net investment income of $943, respectively)............ $ 77,882,092 $ 97,896,230 ============ ============
- ---------- ++ Dividends in excess of net investment income. @@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008. See Notes to Financial Statements 11 Morgan Stanley Real Estate Fund NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (UNAUDITED) 1. Organization and Accounting Policies Morgan Stanley Real Estate Fund (the "Fund") is registered under the Investment Company Act of 1940, as amended (the "Act"), as a non-diversified, open-end management investment company. The Fund's investment objective is to provide high current income and long-term capital appreciation. The Fund was organized as a Massachusetts business trust on November 23, 1998 and commenced operations on April 28, 1999. The Fund offers Class A shares, Class B shares, Class C shares and Class I shares. The four classes are substantially the same except that most Class A shares are subject to a sales charge imposed at the time of purchase and some Class A shares, and most Class B shares and Class C shares are subject to a contingent deferred sales charge imposed on shares redeemed within eighteen months, six years and one year, respectively. Class I shares are not subject to a sales charge. Additionally, Class A shares, Class B shares and Class C shares incur distribution expenses. Effective March 31, 2008, Class D shares were renamed Class I shares. The Fund will assess a 2% redemption fee, on Class A shares, Class B shares, Class C shares, and Class I shares, which is paid directly to the Fund, for shares redeemed within thirty days of purchase, subject to certain exceptions. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading. The following is a summary of significant accounting policies: A. Valuation of Investments -- (1) an equity portfolio security listed or traded on the New York Stock Exchange ("NYSE") or American Stock Exchange or other exchange is valued at its latest sale price prior to the time when assets are valued; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (2) an equity portfolio security listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price; if there were no sales that day, the security is valued at the mean between the last reported bid and asked price; (3) all other portfolio securities for which over-the-counter market quotations are readily available are valued at the mean between the last reported bid and asked price. In cases where a security is traded on more than one exchange, the security is valued on the exchange designated as the primary market; (4) for equity securities traded on foreign exchanges, the last reported sale price or the latest bid price may be used if there were no sales on a particular day; (5) when market quotations are not readily available including circumstances under which Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") determines that the latest sale price, the bid price or the mean between the last reported bid and asked price do not reflect a security's market value, portfolio securities are valued at their fair value as determined in good faith under procedures established by and under the general supervision 12 Morgan Stanley Real Estate Fund NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (UNAUDITED) continued of the Fund's Trustees. Occasionally, developments affecting the closing prices of securities and other assets may occur between the times at which valuations of such securities are determined (that is, close of the foreign market on which the securities trade) and the close of business on the NYSE. If developments occur during such periods that are expected to materially affect the value of such securities, such valuations may be adjusted to reflect the estimated fair value of such securities as of the close of the NYSE, as determined in good faith by the Fund's Trustees or by the Investment Adviser using a pricing service and/or procedures approved by the Trustees of the Fund; (6) certain portfolio securities may be valued by an outside pricing service approved by the Fund's Trustees; (7) investments in open-end mutual funds, including the Morgan Stanley Institutional Liquidity Funds, are valued at net assets value as of the close of each business day; and (8) short-term debt securities having a maturity date of more than sixty days at time of purchase are valued on a mark-to-market basis until sixty days prior to maturity and thereafter at amortized cost based on their value on the 61st day. Short-term debt securities having a maturity date of sixty days or less at the time of purchase are valued at amortized cost. The Fund invests a substantial portion of its assets in securities of real estate investment trusts ("REIT"). The market's perception of prospective declines in private real estate values and other financial assets may result in increased volatility of market prices that can negatively impact the valuation of certain issuers held by the Fund. B. Accounting for Investments -- Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Realized gains and losses on security transactions are determined by the identified cost method. Dividend income and other distributions are recorded on the ex-dividend date. Upon notification from issuers, some of the dividend income received from a real estate investment trust ("REIT") may be redesignated as a reduction of cost of investments and/or realized gain. Discounts are accreted and premiums are amortized over the life of the respective securities. Interest income is accrued daily. C. Multiple Class Allocations -- Investment income, expenses (other than distribution fees), and realized and unrealized gains and losses are allocated to each class of shares based upon the relative net asset value on the date such items are recognized. Distribution fees are charged directly to the respective class. D. Foreign Currency Translation and Forward Foreign Currency Contracts -- The books and records of the Fund are maintained in U.S. dollars as follows: (1) the foreign currency market value of investment securities, other assets and liabilities and forward foreign currency contracts ("forward contracts") are translated at the exchange rates prevailing at the end of the period; and (2) purchases, sales, income and expenses are translated at the exchange rates prevailing on the respective dates of such 13 Morgan Stanley Real Estate Fund NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (UNAUDITED) continued transactions. The resultant exchange gains and losses are recorded as realized and unrealized gain/loss on foreign exchange transactions. Pursuant to U.S. federal income tax regulations, certain foreign exchange gains/losses included in realized and unrealized gain/loss are included in or are a reduction of ordinary income for federal income tax purposes. The Fund does not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of the securities. Forward contracts are valued daily at the appropriate exchange rates. The resultant unrealized exchange gains and losses are recorded as unrealized foreign currency gain or loss. The Fund records realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction prior to delivery. E. Federal Income Tax Policy -- It is the Fund's policy to comply with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes is required. The Fund files tax returns with the U.S. Internal Revenue Service, New York State and New York City. The Fund adopted the provisions of the Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48") Accounting for Uncertainty in Income Taxes on May 30, 2008. FIN 48 sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return. The implementation of FIN 48 did not result in any unrecognized tax benefits in the accompanying financial statements. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in other expenses in the Statement of Operations. Each of the tax years in the four year period ended May 31, 2008, remains subject to examination by taxing authorities. F. Dividends and Distributions to Shareholders -- Dividends and distributions to shareholders are recorded on the ex-dividend date. G. Use of Estimates -- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. 2. Investment Advisory/Administration Agreements Pursuant to an Investment Advisory Agreement, the Fund pays the Investment Adviser an advisory fee, accrued daily and payable monthly, by applying the annual rate of 0.80% to the portion of the daily net assets not exceeding $500 million; 0.75% to the portion of the daily net assets exceeding $500 million but not exceeding $1 billion and 0.70% to the portion of the daily net assets in excess of $1 billion. 14 Morgan Stanley Real Estate Fund NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (UNAUDITED) continued Pursuant to an Administration Agreement with Morgan Stanley Services Company Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund pays an administration fee, accrued daily and payable monthly, by applying the annual rate of 0.08% to the Fund's daily net assets. Under an agreement between the Administrator and State Street Bank and Trust Company ("State Street"), State Street provides certain administrative services to the Fund. For such services, the Administrator pays State Street a portion of the fee the Administrator receives from the Fund. 3. Plan of Distribution Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the "Distributor"), an affiliate of the Investment Adviser and Administrator. The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan provides that the Fund will pay the Distributor a fee which is accrued daily and paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the average daily net assets of Class A shares; (ii) Class B -- up to 1.0% of the average daily net assets of Class B shares; and (iii) Class C -- up to 1.0% of the average daily net assets of Class C shares. In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $3,386,019 at May 31, 2008. In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors and other authorized financial representatives at the time of sale may be reimbursed in the subsequent calendar year. For the six months ended May 31, 2008, the distribution fee was accrued for Class A shares and Class C shares at the annual rate of 0.23% and 0.74%, respectively. The Distributor has informed the Fund that for the six months ended May 31, 2008, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B 15 Morgan Stanley Real Estate Fund NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (UNAUDITED) continued shares and Class C shares of $38, $20,365 and $188, respectively and received $8,757 in front-end sales charges from sales of the Fund's Class A shares. The respective shareholders pay such charges which are not an expense of the Fund. 4. Security Transactions and Transactions with Affiliates The Fund invests in Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional Class, an open-end management investment company managed by the Investment Adviser. Investment advisory fees paid by the Fund are reduced by an amount equal to the advisory and administrative service fees paid by Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional Class with respect to assets invested by the Fund in Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional Class. For the six months ended May 31, 2008, advisory fees paid were reduced by $1,107 relating to the Fund's investment in Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional Class. Income distributions earned by the Fund are recorded as dividends from affiliate in the Statement of Operations and totaled $38,586 for the six months ended May 31, 2008. During the six months ended May 31, 2008, cost of purchases and sales of investments in Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional Class aggregated $16,948,762 and $14,805,977, respectively. The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the six months ended May 31, 2008 aggregated $8,849,038 and $28,420,627, respectively. For the six months ended May 31, 2008, the Fund incurred brokerage commissions of $47 with Morgan Stanley & Co., Inc., an affiliate of the Investment Adviser, Administrator and Distributor, for portfolio transactions executed on behalf of the Fund. At May 31, 2008, Morgan Stanley Multi-Asset Class Fund, an affiliate of the Investment Adviser, Administrator and Distributor, held 143,354 Class I shares of beneficial interest of the Fund. Morgan Stanley Trust, an affiliate of the Investment Adviser, Administrator and Distributor, is the Fund's transfer agent. The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Trustee to defer payment of all, or a portion, of the fees he or she receives for serving on the Board of Trustees. Each eligible Trustee generally may elect to have the deferred amounts credited with a return equal to the total return on one or more of the Morgan Stanley funds that are offered as investment options under the Compensation Plan. Appreciation/depreciation and distributions received from these investments are recorded with an offsetting increase/decrease in the deferred compensation obligation and do not affect the net asset value of the Fund. 16 Morgan Stanley Real Estate Fund NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (UNAUDITED) continued 5. Shares of Beneficial Interest++ Transactions in shares of beneficial interest were as follows:
FOR THE SIX MONTHS ENDED FOR THE YEAR MAY 31, 2008 ENDED ----------------------- NOVEMBER 30, 2007 (unaudited) ------------------------- SHARES AMOUNT SHARES AMOUNT --------- ----------- ---------- ------------ CLASS A SHARES Sold................................... 189,851 $ 1,763,362 674,309 $ 11,585,000 Conversion from Class B................ 95,914 864,939 1,394,930 24,175,203 Reinvestment of dividends and distributions........................ 1,402,284 12,613,720 356,893 5,849,406 Redeemed............................... (867,105) (8,140,086) (1,473,175) (24,248,876) --------- ----------- ---------- ------------ Net increase - Class A................. 819,944 7,091,935 952,957 17,360,733 --------- ----------- ---------- ------------ CLASS B SHARES Sold................................... 18,046 162,781 153,437 2,670,011 Conversion to Class A.................. (97,590) (864,939) (1,402,075) (24,175,203) Reinvestment of dividends and distributions........................ 1,222,928 10,936,747 797,655 13,014,504 Redeemed............................... (789,943) (7,540,044) (1,685,935) (27,834,091) --------- ----------- ---------- ------------ Net increase (decrease) - Class B...... 353,441 2,694,545 (2,136,918) (36,324,779) --------- ----------- ---------- ------------ CLASS C SHARES Sold................................... 7,833 73,431 96,170 1,648,455 Reinvestment of dividends and distributions........................ 403,557 3,605,593 177,600 2,897,242 Redeemed............................... (181,151) (1,683,249) (473,609) (7,816,436) --------- ----------- ---------- ------------ Net increase (decrease) - Class C...... 230,239 1,995,775 (199,839) (3,270,739) --------- ----------- ---------- ------------ CLASS I SHARES@@ Sold................................... 19,631 171,723 159,221 2,590,112 Reinvestment of dividends and distributions........................ 220,976 1992,286 118,793 1,950,471 Redeemed............................... (116,510) (1,080,248) (469,700) (7,812,337) --------- ----------- ---------- ------------ Net increase (decrease) - Class I...... 124,097 1,083,761 (191,686) (3,271,754) --------- ----------- ---------- ------------ Net increase (decrease) in Fund........ 1,527,721 $12,866,016 (1,575,486) $(25,506,539) ========= =========== ========== ============
- ---------- @@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008. ++ Effective at close of business on January 12, 2007, the Fund suspended offering its shares to new investors, except as follows: The Fund will continue to offer shares (1) through certain retirement plan accounts, (2) to clients of registered investment advisers who currently offer shares of the Fund in their discretionary asset allocation programs, (3) through certain endowments and foundations, (4) to clients of family office practices where shares of the Fund are held by family members of such clients, (5) to directors and trustees of the Morgan Stanley funds, (6) to Morgan Stanley affiliates and their employees and (7) to benefit plans sponsored by Morgan Stanley and its affiliates. The Fund will continue to offer shares to its existing shareholders and, as market conditions permit, may recommence offering shares to other new investors in the future. Any such offerings of the Fund's shares may be limited in amount and may commence and terminate without any prior notice. 17 Morgan Stanley Real Estate Fund NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (UNAUDITED) continued 6. Expense Offset The expense offset represents a reduction of the fees and expenses for interest earned on cash balances maintained by the Fund with the transfer agent. 7. Federal Income Tax Status The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations which may differ from generally accepted accounting principles. These "book/tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for tax purposes are reported as distributions of paid-in-capital. As of November 30, 2007, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales. 8. Fair Valuation Measurements The Fund adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("FAS 157"), effective December 1, 2007. In accordance with FAS 157, fair value is defined as the price that the Fund would receive to sell an investment or pay to transfer a liability in a timely transaction with an independent buyer in the principal market, or in the absence of a principal market the most advantageous market for the investment or liability. FAS 157 establishes a three-tier hierarchy to distinguish between (1) inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) inputs that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances (unobservable inputs) and to establish classification of fair value measurements for disclosure purposes. Various inputs are used in determining the value of the Fund's investments. The inputs are summarized in the three broad levels listed below. - Level 1 -- quoted prices in active markets for identical investments - Level 2 -- other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) - Level 3 -- significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) 18 Morgan Stanley Real Estate Fund NOTES TO FINANCIAL STATEMENTS - MAY 31, 2008 (UNAUDITED) continued The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following is a summary of the inputs used as of May 31, 2008 in valuing the Fund's investments carried at value:
FAIR VALUE MEASUREMENTS AT MAY 31, 2008 USING --------------------------------------------------- QUOTED PRICES IN SIGNIFICANT SIGNIFICANT ACTIVE MARKET FOR OTHER OBSERVABLE UNOBSERVABLE IDENTICAL ASSETS INPUTS INPUTS TOTAL (LEVEL 1) (LEVEL 2) (LEVEL 3) ----------- ----------------- ---------------- ------------ Investments in Securities...... $78,805,392 $78,805,392 -- -- =========== =========== ========= ============
Following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining value:
INVESTMENTS IN SECURITIES -------------- Beginning Balance.............................................. $ 5,315 Net purchases (sales)........................................ -- Transfers in and/or out...................................... -- Change in unrealized appreciation/depreciation............... (5,315) Realized gains (losses)...................................... -- ------- Ending Balance................................................. $ -- ======= Net change in unrealized appreciation/depreciation from investments still held as of May 31, 2008.................... $(5,315) =======
9. Accounting Pronouncement On March 19, 2008, FASB released Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk- related contingent features in derivative agreements. The application of SFAS 161 is required for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. At this time, management is evaluating the implications of SFAS 161 and its impact on the financial statements has not yet been determined. 19 Morgan Stanley Real Estate Fund FINANCIAL HIGHLIGHTS Selected ratios and per share data for a share of beneficial interest outstanding throughout each period:
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30, MONTHS ENDED ---------------------------------------------- MAY 31, 2008 2007 2006 2005 2004 2003 ------------ ------- ------- ------- ------- ------ (unaudited) Class A Shares Selected Per Share Data: Net asset value, beginning of period......... $14.60 $20.23 $19.72 $17.47 $13.58 $10.59 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income(1).................. 0.18 0.13 0.08 0.19 0.17 0.32 Net realized and unrealized gain (loss)... (0.21) (2.23) 5.73 3.60 4.29 3.20 ------ ------ ----- ----- ----- ----- Total income (loss) from investment operations.................................. (0.03) (2.10) 5.81 3.79 4.46 3.52 ------ ------ ----- ----- ----- ----- Less dividends and distributions: From net investment income................ (0.11) -- -- (0.20) (0.18) (0.32) In excess of net investment income........ -- (0.20) (0.17) -- -- -- From net realized gain.................... (4.99) (3.33) (5.13) (1.34) (0.39) (0.21) ------ ------ ------ ------ ------ ------ Total dividends and distributions............ (5.10) (3.53) (5.30) (1.54) (0.57) (0.53) ------ ------ ------ ------ ------ ------ Net asset value, end of period............... $9.47 $14.60 $20.23 $19.72 $17.47 $13.58 ===== ====== ====== ====== ====== ====== Total Return(2).............................. 1.69%(5) (12.00)% 39.68% 23.11% 33.84% 34.61% Ratios to Average Net Assets(3): Total expenses (before expense offset)....... 1.64%(4)(6) 1.45 %(4) 1.45% 1.50% 1.62% 1.62% Net investment income........................ 3.83%(4)(6) 0.88 %(4) 0.51% 1.04% 1.21% 2.77% Supplemental Data: Net assets, end of period, in thousands...... $34,134 $40,643 $37,022 $23,622 $11,210 $7,378 Portfolio turnover rate...................... 11%(5) 23 % 20% 21% 14% 23%
- ---------- (1) The per share amounts were computed using an average number of shares outstanding during the period. (2) Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. (4) Reflects rebate of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets had an effect of less than 0.005%. (5) Not annualized. (6) Annualized.
See Notes to Financial Statements 20 Morgan Stanley Real Estate Fund FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30, MONTHS ENDED ------------------------------------------------- MAY 31, 2008 2007 2006 2005 2004 2003 ------------ ------- ------- ------- -------- -------- (unaudited) Class B Shares Selected Per Share Data: Net asset value, beginning of period......... $14.52 $20.12 $19.64 $17.40 $13.53 $10.55 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income (loss)(1)........... 0.15 0.03 (0.04) 0.05 0.07 0.24 Net realized and unrealized gain (loss)... (0.22) (2.24) 5.69 3.59 4.26 3.19 ------ ------ ----- ----- ----- ----- Total income (loss) from investment operations.................................. (0.07) (2.21) 5.65 3.64 4.33 3.43 ------ ------ ----- ----- ----- ----- Less dividends and distributions: From net investment income................ (0.06) -- -- (0.06) (0.07) (0.24) In excess of net investment income........ -- (0.06) (0.04) -- -- -- From net realized gain.................... (4.99) (3.33) (5.13) (1.34) (0.39) (0.21) ------ ------ ------ ------ ------ ------ Total dividends and distributions............ (5.05) (3.39) (5.17) (1.40) (0.46) (0.45) ------ ------ ------ ------ ------ ------ Net asset value, end of period............... $9.40 $14.52 $20.12 $19.64 $17.40 $13.53 ===== ====== ====== ====== ====== ====== Total Return(2).............................. 1.28%(5) (12.67)% 38.56 % 22.18% 32.81% 33.64% Ratios to Average Net Assets(3): Total expenses (before expense offset)....... 2.41%(4)(6) 2.22 %(4) 2.21 % 2.26% 2.38% 2.37% Net investment income (loss)................. 3.06%(4)(6) 0.11 %(4)(0.24)% 0.28% 0.45% 2.02% Supplemental Data: Net assets, end of period, in thousands...... $27,340 $37,094 $94,390 $95,184 $114,483 $108,680 Portfolio turnover rate...................... 11%(5) 23 % 20 % 21% 14% 23%
- ---------- (1) The per share amounts were computed using an average number of shares outstanding during the period. (2) Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. (4) Reflects rebate of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets had an effect of less than 0.005%. (5) Not annualized. (6) Annualized.
See Notes to Financial Statements 21 Morgan Stanley Real Estate Fund FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30, MONTHS ENDED ----------------------------------------------- MAY 31, 2008 2007 2006 2005 2004 2003 ------------ ------- ------- ------- ------- ------- (unaudited) Class C Shares Selected Per Share Data: Net asset value, beginning of period......... $14.52 $20.12 $19.64 $17.40 $13.53 $10.55 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income (loss)(1)........... 0.15 0.02 (0.04) 0.06 0.06 0.23 Net realized and unrealized gain (loss)... (0.21) (2.23) 5.70 3.59 4.27 3.20 ------ ------ ----- ----- ----- ----- Total income (loss) from investment operations.................................. (0.06) (2.21) 5.66 3.65 4.33 3.43 ------ ------ ----- ----- ----- ----- Less dividends and distributions: From net investment income................ (0.07) -- -- (0.07) (0.07) (0.24) In excess of net investment income........ -- (0.06) (0.05) -- -- -- From net realized gain.................... (4.99) (3.33) (5.13) (1.34) (0.39) (0.21) ------ ------ ------ ------ ------ ------ Total dividends and distributions............ (5.06) (3.39) (5.18) (1.41) (0.46) (0.45) ------ ------ ------ ------ ------ ------ Net asset value, end of period............... $9.40 $14.52 $20.12 $19.64 $17.40 $13.53 ===== ====== ====== ====== ====== ====== Total Return(2).............................. 1.46%(5) (12.64)% 38.63 % 22.24% 32.83% 33.54% Ratios to Average Net Assets(3): Total expenses (before expense offset)....... 2.15%(4)(6) 2.22 %(4) 2.18 % 2.23% 2.38% 2.37% Net investment income (loss)................. 3.32%(4)(6) 0.11 %(4)(0.22)% 0.31% 0.45% 2.02% Supplemental Data: Net assets, end of period, in thousands...... $9,599 $11,486 $19,939 $15,434 $15,261 $12,359 Portfolio turnover rate...................... 11%(5) 23 % 20 % 21% 14% 23%
- ---------- (1) The per share amounts were computed using an average number of shares outstanding during the period. (2) Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day of the period. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. (4) Reflects rebate of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets had an effect of less than 0.005%. (5) Not annualized. (6) Annualized.
See Notes to Financial Statements 22 Morgan Stanley Real Estate Fund FINANCIAL HIGHLIGHTS continued
FOR THE SIX FOR THE YEAR ENDED NOVEMBER 30, MONTHS ENDED ---------------------------------------------- MAY 31, 2008 2007 2006 2005 2004 2003 ------------ ------ ------- ------- ------- ------- (unaudited) Class I Shares@@ Selected Per Share Data: Net asset value, beginning of period......... $14.63 $20.26 $19.75 $17.48 $13.59 $10.59 ------ ------ ------ ------ ------ ------ Income (loss) from investment operations: Net investment income(1).................. 0.19 0.19 0.13 0.23 0.21 0.34 Net realized and unrealized gain (loss)... (0.21) (2.25) 5.73 3.62 4.28 3.22 ------ ------ ----- ----- ----- ----- Total income (loss) from investment operations.................................. (0.02) (2.06) 5.86 3.85 4.49 3.56 ------ ------ ----- ----- ----- ----- Less dividends and distributions: From net investment income................ (0.12) -- -- (0.24) (0.21) (0.35) In excess of net investment income........ -- (0.24) (0.22) -- -- -- From net realized gain.................... (4.99) (3.33) (5.13) (1.34) (0.39) (0.21) ------ ------ ------ ------ ------ ------ Total dividends and distributions............ (5.11) (3.57) (5.35) (1.58) (0.60) (0.56) ------ ------ ------ ------ ------ ------ Net asset value, end of period............... $9.50 $14.63 $20.26 $19.75 $17.48 $13.59 ===== ====== ====== ====== ====== ====== Total Return(2).............................. 1.84%(5) (11.77)% 39.96% 23.50% 34.13% 34.92% Ratios to Average Net Assets(3): Total expenses (before expense offset)....... 1.41%(4)(6) 1.22 %(4) 1.21% 1.26% 1.38% 1.37% Net investment income........................ 4.06%(4)(6) 1.11 %(4) 0.76% 1.28% 1.45% 3.02% Supplemental Data: Net assets, end of period, in thousands...... $6,809 $8,674 $15,895 $16,017 $71,433 $58,930 Portfolio turnover rate...................... 11%(5) 23 % 20% 21% 14% 23%
- ---------- @@ Formerly Class D shares. Renamed Class I shares effective March 31, 2008. (1) The per share amounts were computed using an average number of shares outstanding during the period. (2) Calculated based on the net asset value as of the last business day of the period. (3) Reflects overall Fund ratios for investment income and non-class specific expenses. (4) Reflects rebate of certain Fund expenses in connection with the investments in Morgan Stanley Institutional Liquidity Money Market Portfolio -- Institutional Class during the period. As a result of such rebate, the expenses as a percentage of its net assets had an effect of less than 0.005%. (5) Not annualized. (6) Annualized.
See Notes to Financial Statements 23 TRUSTEES Frank L. Bowman Michael Bozic Kathleen A. Dennis James F. Higgins Dr. Manuel H. Johnson Joseph J. Kearns Michael F. Klein Michael E. Nugent W. Allen Reed Fergus Reid OFFICERS Michael E. Nugent Chairperson of the Board Ronald E. Robison President and Principal Executive Officer Kevin Klingert Vice President Dennis F. Shea Vice President Amy R. Doberman Vice President Carsten Otto Chief Compliance Officer Stefanie V. Chang Yu Vice President Francis J. Smith Treasurer and Chief Financial Officer Mary E. Mullin Secretary TRANSFER AGENT Morgan Stanley Trust Harborside Financial Center, Plaza Two Jersey City, New Jersey 07311 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Deloitte & Touche LLP Two World Financial Center New York, New York 10281 LEGAL COUNSEL Clifford Chance US LLP 31 West 52nd Street New York, NY 10019 COUNSEL TO THE INDEPENDENT TRUSTEES Kramer Levin Naftalis & Frankel LLP 1177 Avenue of the Americas New York, NY 10036 INVESTMENT ADVISER Morgan Stanley Investment Advisors Inc. 522 Fifth Avenue New York, New York 10036 The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors and accordingly they do not express an opinion thereon. This report is submitted for the general information of the shareholders of the Fund. For more detailed information about the Fund, its fees and expenses and other pertinent information, please read its Prospectus. The Fund's Statement of Additional Information contains additional information about the Fund, including its trustees. It is available, without charge, by calling (800) 869-NEWS. This report is not authorized for distribution to prospective investors in the Fund unless preceded or accompanied by an effective Prospectus. Read the Prospectus carefully before investing. Morgan Stanley Distributors Inc., member FINRA. (c) 2008 Morgan Stanley [MORGAN STANLEY LOGO] MORGAN STANLEY FUNDS Morgan Stanley Real Estate Fund Semiannual Report May 31, 2008 REFSAN LU08-03852P-Y05/08 Item 2. Code of Ethics. Not applicable for semiannual reports. Item 3. Audit Committee Financial Expert. Not applicable for semiannual reports. Item 4. Principal Accountant Fees and Services Not applicable for semiannual reports. Item 5. Audit Committee of Listed Registrants. Not applicable for semiannual reports. Item 6. Refer to Item 1. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable for semiannual reports. Item 8. Portfolio Managers of Closed-End Management Investment Companies Applicable only to reports filed by closed-end funds. Item 9. Closed-End Fund Repurchases Applicable to reports filed by closed-end funds. Item 10. Submission of Matters to a Vote of Security Holders Not applicable. Item 11. Controls and Procedures (a) The Fund's principal executive officer and principal financial officer have concluded that the Fund's disclosure controls and procedures are sufficient to ensure that information required to be disclosed by the Fund in this Form N-CSR was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, based upon such officers' evaluation of these controls and procedures as of a date within 90 days of the filing date of the report. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits (a) Code of Ethics - Not applicable for semiannual reports. (b) A separate certification for each principal executive officer and principal financial officer of the registrant are attached hereto as part of EX-99.CERT. 2 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Morgan Stanley Real Estate Fund /s/ Ronald E. Robison - ------------------------------------- Ronald E. Robison Principal Executive Officer July 17, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Ronald E. Robison - ------------------------------------- Ronald E. Robison Principal Executive Officer July 17, 2008 /s/ Francis Smith - ------------------------------------- Francis Smith Principal Financial Officer July 17, 2008 3 EX-99.CERT 2 y60281exv99wcert.txt EX-99.CERT: CERTIFICATION EXHIBIT 12 B1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATIONS I, Ronald E. Robison, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Real Estate Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 4 a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: July 17, 2008 /s/ Ronald E. Robison ---------------------------------------- Ronald E. Robison Principal Executive Officer 5 EXHIBIT 12 B2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATIONS I, Francis Smith, certify that: 1. I have reviewed this report on Form N-CSR of Morgan Stanley Real Estate Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): 6 a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: July 17, 2008 /s/ Francis Smith ---------------------------------------- Francis Smith Principal Financial Officer 7 EX-99.906CERT 3 y60281exv99w906cert.txt EX-99.906CERT: CERTIFICATION SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Real Estate Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended May 31, 2008 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: July 17, 2008 /s/ Ronald E. Robison ---------------------------------------- Ronald E. Robison Principal Executive Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Real Estate Fund and will be retained by Morgan Stanley Real Estate Fund and furnished to the Securities and Exchange Commission or its staff upon request. 8 SECTION 906 CERTIFICATION Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Morgan Stanley Real Estate Fund In connection with the Report on Form N-CSR (the "Report") of the above-named issuer for the period ended May 31, 2008 that is accompanied by this certification, the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: July 17, 2008 /s/ Francis Smith ---------------------------------------- Francis Smith Principal Financial Officer A signed original of this written statement required by Section 906 has been provided to Morgan Stanley Real Estate Fund and will be retained by Morgan Stanley Real Estate Fund and furnished to the Securities and Exchange Commission or its staff upon request. 9 -----END PRIVACY-ENHANCED MESSAGE-----