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.

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.

The 12-month period under review was highly positive both for the direct real estate market as well as the public real estate securities market, with the latter rising nearly 37 percent according to the FTSE NAREIT Equity REIT Index. The very strong performance of the public securities market over the period may be attributed to the following factors: evidence of continued improvements in underlying real estate values in the direct real estate market; the stronger outlook for the recovery of property fundamentals, which has been supported by favorable earnings results by the public companies; and continued take-private activity and speculation. Real estate equities also rose sharply as a result of strong fund flows from both institutional and individual investors into the sector. These inflows were largely the result of what we believe to be the sectors' relative attractiveness over other areas of the equities market in terms of diversification benefits, low volatility, compelling yield and risk-adjusted return potential.

Among the major U.S. real estate investment trust (REIT) sectors, apartment and office stocks outperformed while retail stocks lagged. The favorable performance of the apartment stocks was due to strong reported earnings and their favorable forward outlook. The sector also benefited from upgraded views on underlying asset values due to transactional evidence, including takeover activity in the sector. The office sector posted strong returns due to continued evidence of strength in private market values, as observed in individual transactions as well as significant continued takeover activity. Office REITs also benefited from a recovery in this sector, though the recovery continues to be experienced unevenly across geographic markets. Fundamentals continued to remain strong in the retail sector; however, the retail REITs appeared to be hurt by investor concerns over the potential negative impact of higher interest rates, higher energy costs, and a weaker housing market on consumer spending. The performance of mall REITs, in particular, was negatively impacted by company-specific issues at two of the larger mall owners. Among the smaller REIT sectors, the health care and storage sectors performed in line, while the hotel sector underperformed.

Morgan Stanley Real Estate Fund outperformed both the FTSE NAREIT Equity REIT Index and the Lipper Real Estate Funds Index for the 12 months ended November 30, 2006, assuming no deduction of applicable sales charges.

The Fund's outperformance during the period was driven primarily by bottom-up stock selection, and top-down sector allocation was also favorable. The Fund's stock selection was especially strong in the mall and office sectors. Within the mall sector, the Fund benefited from its underweight to two of the weakest malls stocks relative to the FTSE NAREIT Equity REIT Index, which had company-specific issues. Favorable stock selection in the office sector was a result of the Portfolio's exposure to several office stocks which agreed to be taken private at premiums, as well as other owners of major urban office assets. This was slightly offset by stock selection in the industrial sector, where the Fund underweighted specific industrial companies relative to the FTSE NAREIT Equity REIT Index.

From a top-down perspective, the most significant favorable contributors to outperformance during the period were from the overweight to the apartment and office sectors and underweight to the mixed office/industrial sector. This was partially offset by the overweight to the mall and hotel sectors, which detracted from performance.

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.

Data as of November 30, 2006. Subject to change daily. All percentages for top 10 holdings are as a percentage of net assets and all percentages for portfolio composition are as a percentage of total investments. These data are provided for informational purposes only and should not be deemed a recommendation to buy or sell the securities mentioned. Morgan Stanley is a full-service securities firm engaged in securities trading and brokerage activities, investment banking, research and analysis, financing and financial advisory services.

The Fund will normally invest at least 80 percent of its assets in income producing common stocks and other equity securities (which may include convertible securities) of companies that are principally engaged in the U.S. real estate industry. A company is considered to be "principally engaged" in the U.S. real estate industry if (i) it derives at least 50 percent of its revenues or profits from the ownership, leasing, construction, management, development, financing or sale of residential, commercial or industrial real estate; or (ii) it has at least 50 percent of the value of its assets invested in U.S. residential, commercial or industrial real estate. Companies primarily engaged in the real estate industry may include real estate investment trusts known as "REITs," which pool investor funds mostly for investment in commercial real estate properties. They also may include, among other businesses, real estate developers, brokers and operating companies, as well as companies whose products and services are significantly related to the real estate industry, such as building suppliers and mortgage lenders. In deciding which securities to buy, hold or sell, the Fund's "Investment Adviser," Morgan Stanley Investment Advisors Inc., considers market, economic and political factors.

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.

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.

To reduce printing and mailing costs, the Fund attempts to eliminate duplicate mailings to the same address. The Fund delivers a single copy of certain shareholder documents, including shareholder reports, prospectuses and proxy materials, to investors with the same last name who reside at the same address. Your participation in this program will continue for an unlimited period of time unless you instruct us otherwise. You can request multiple copies of these documents by calling (800) 350-6414, 8:00 a.m. to 8:00 p.m., ET. Once our Customer Service Center has received your instructions, we will begin sending individual copies for each account within 30 days.

Performance 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 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.

(1) The FTSE NAREIT Equity REIT Index (formerly NAREIT Equity Index) measures the performance of real estate securities, which will fluctuate with changes in the values of their underlying properties. The Index is an unmanaged benchmark of real estate investment trusts. 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.

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 06/01/06 – 11/30/06.

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.

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.

* Expenses are equal to the Fund's annualized expense ratios of 1.47%, 2.22%, 2.22% and 1.22% 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).

†† A security with a total market value equal to $5,315 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.

(b) The aggregate cost for federal income tax purposes is $81,713,511. The aggregate gross unrealized appreciation is $86,399,467 and the aggregate gross unrealized depreciation is $535,584, resulting in net unrealized appreciation of $85,863,883.

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

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

The Fund will assess a 2% redemption fee on Class A shares, Class B shares, Class C shares, and Class D shares, which is paid directly to the Fund, for shares redeemed within thirty days of purchase, subject to certain exceptions. The redemption fee is designed to protect the Fund and its remaining shareholders from the effects of short-term trading.

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 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; 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 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 in the market prices of securities held. Forward contracts are valued daily at the appropriate exchange rates. The resultant unrealized exchange gains and losses are recorded as unrealized foreign currency gain or loss. The Fund records realized gains or losses on delivery of the currency or at the time the forward contract is extinguished (compensated) by entering into a closing transaction prior to delivery.

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

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

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

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.

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

average daily net assets of Class A; (ii) Class B — up to 1.0% of the average daily net assets of Class B; and (iii) Class C — up to 1.0% of the average daily net assets of Class C.

In the case of Class B shares, provided that the Plan continues in effect, any cumulative expenses incurred by the Distributor but not yet recovered may be recovered through the payment of future distribution fees from the Fund pursuant to the Plan and contingent deferred sales charges paid by investors upon redemption of Class B shares. Although there is no legal obligation for the Fund to pay expenses incurred in excess of payments made to the Distributor under the Plan and the proceeds of contingent deferred sales charges paid by investors upon redemption of shares, if for any reason the Plan is terminated, the Trustees will consider at that time the manner in which to treat such expenses. The Distributor has advised the Fund that such excess amounts totaled $4,074,377 at November 30, 2006.

In the case of Class A shares and Class C shares, expenses incurred pursuant to the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily net assets of Class A or Class C, respectively, will not be reimbursed by the Fund through payments in any subsequent year, except that expenses representing a gross sales credit to Morgan Stanley Financial Advisors and other authorized financial representatives at the time of sale may be reimbursed in the subsequent calendar year. For the year ended November 30, 2006, 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, 2006, it received contingent deferred sales charges from certain redemptions of the Fund's Class A shares, Class B shares and Class C shares of $661, $149,040 and $2,271, respectively and received $112,639 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.

The cost of purchases and proceeds from sales of portfolio securities, excluding short-term investments, for the year ended November 30, 2006 aggregated $30,184,264 and $60,412,680, respectively. Included in the aforementioned transaction is a sale of $25,996 with another Morgan Stanley fund, including a realized gain of $6,001.

For the year ended November 30, 2006, the Fund incurred brokerage commissions of $1,608 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, 2006, Morgan Stanley Multi-Asset Class Fund, an affiliate of the Investment Adviser, Administrator and Distributor, held 81,500 Class D shares of beneficial interest of the Fund.

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

The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan") which allows each independent Trustee to defer payment of all, or a portion, of the fees he 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.

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.

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, 2006, the Fund had temporary book/tax differences primarily attributable to capital loss deferrals on wash sales and income from the mark-to-market of passive foreign investment companies.

Permanent differences, due to a dividend redesignation, a nondeductible expense and foreign currency gains, resulted in the following reclassifications among the Fund's components of net assets at November 30, 2006:

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, were named as defendants in a consolidated class action. This consolidated action also named as defendants certain individual Trustees and Directors of the Morgan Stanley funds. The consolidated amended complaint, filed in the United States District Court for the Southern District of New York on April 16, 2004, generally alleged that defendants, including the Fund, violated their statutory disclosure obligations and fiduciary duties by failing properly to disclose (i) that the Investment Adviser and certain affiliates of the Investment Adviser allegedly offered economic incentives to brokers and others to recommend the funds advised by the Investment Adviser or its affiliates to investors rather than funds managed by other companies, and (ii) that the funds advised by the Investment Adviser or its affiliates, including the Fund, allegedly paid excessive commissions to brokers in return for their alleged efforts to recommend these funds to investors. The complaint sought, among other things, unspecified compensatory damages, rescissionary damages, fees and costs. On July 2, 2004, defendants moved to dismiss the action. On March 9, 2005, plaintiffs filed a Motion for Leave to File a Supplemental Pleading that would, among other things, expand the allegations and alleged class. On April 14, 2006, the Court granted defendants' motion to dismiss in its entirety, with prejudice. Additionally, plaintiffs' Motion for Leave to File a Supplemental Pleading was denied. The time for plaintiffs to appeal the orders granting defendants' motion to dismiss and denying plaintiffs' motion for supplemental pleading has expired. This case is now concluded.

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Fund will adopt FIN 48 for the fiscal year ending 2008 and the impact to the Fund's financial statements, if any, is currently being assessed.

In addition, in September 2006, Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal years beginning after November 15, 2007. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the impact the adoption of SFAS 157 will have on the Fund's financial statement disclosures.

Effective at the close of business on January 12, 2007, the Fund has 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 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.

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

‡ 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.

‡ 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.

‡ 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.

‡ 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.

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, 2006, 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, 2006, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. 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, 2006, 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.

On August 1, 2006, a Special Meeting of Shareholders of the Fund was scheduled in order to vote on the proposals set forth below. The proposals failed to obtain the necessary quorum in order to hold the meeting, and, therefore, the meeting was adjourned until August 23, 2006 and later further adjourned to September 27, 2006, to permit further solicitation of proxies. The meeting was held on September 27, 2006 and the voting results with respect to these proposals were as follows:

The following Trustees were not standing for reelection at this meeting: Michael Bozic, Edwin J. Garn, Wayne E. Hedien, Dr. Manuel H. Johnson and Michael E. Nugent.

* Broker "non-votes" are shares held in street name for which the broker indicates that instructions have not been received from the beneficial owners or other persons entitled to vote and for which the broker does not have discretionary voting authority.

* This is the earliest date the Trustee began serving the funds advised by Morgan Stanley Investment Advisors Inc. (the "Investment Adviser") (the "Retail Funds") or the funds advised by Morgan Stanley Investment Management Inc. and Morgan Stanley AIP GP LP (the "Institutional Funds").

** 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.) as of November 30, 2006.

* This is the earliest date the Officer began serving the Retail Funds or the Institutional Funds.

2006 Federal Tax Notice (unaudited)
For the fiscal year ended November 30, 2006, 2.22% of the ordinary dividends paid by the Fund qualified for the dividends received deduction available to corporations. Additionally, please note that $248,193 of the Fund's ordinary dividends paid during the fiscal year ended November 30, 2006 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, 2006, the Fund paid to its shareholders $5.08 per share from long-term capital gains.

Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid

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

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.

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.

(d) Not applicable.

(e) Not applicable.

(f)

(1) The Fund’s Code of Ethics is attached hereto as Exhibit 12 A.

(2) Not applicable.

(3) Not applicable.

Item 3. Audit Committee Financial Expert.

The Fund’s Board of Trustees has determined that Joseph J. Kearns, an “independent” Trustee, is an “audit committee financial expert” serving on its audit committee. 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

Item 4. Principal Accountant Fees and Services.

(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:

2006

	Registrant			Covered Entities(1)
Audit Fees	$	31,200		N/A

Non-Audit Fees
Audit-Related Fees	$	531	(2)	$	5,162,000	(2)
Tax Fees	$	6,480	(3)	$	1,389,000	(4)
All Other Fees	$	—	(5)	$	—	(5)
Total Non-Audit Fees	$	7,011		$	6,551,000

Total	$	38,211		$	6,551,000

2005

	Registrant			Covered Entities(1)
Audit Fees	$	30,448		N/A

Non-Audit Fees
Audit-Related Fees	$	540	(2)	$	3,215,745	(2)
Tax Fees	$	5,998	(3)	$	24,000	(4)
All Other Fees	$	—	(5)	$	—	(5)
Total Non-Audit Fees	$	6,538		$	3,239,745

Total	$	36,986		$	3,239,745

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.

(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.

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

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

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

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: Frank Bowman, Wayne Hedien, Joseph Kearns, Michael Nugent and Allen Reed.

(b) Not applicable.

Item 6. Schedule of Investments

Refer to Item 1.

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 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) 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.

Investment Company Act file number:			811- 09117

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

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

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

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

Date of fiscal year end:	November 30, 2006

Date of reporting period:		November 30, 2006

Total Return for the 12 Months Ended November 30, 2006
Class A			Class B			Class C			Class D			FTSE NAREIT Equity REIT Index¹			Lipper Real Estate Funds Index²
	39.68	%		38.56	%		38.63	%		39.96	%		36.93	%		33.80	%

TOP 10 HOLDINGS
Simon Property Group, Inc.	9.4	%
Boston Properties, Inc.	6.5
Host Hotels & Resorts Inc.	5.9
Brookfield Properties Corp. (Canada)	5.5
AvalonBay Communities, Inc.	5.3
Starwood Hotels & Resorts Worldwide, Inc.	5.1
Archstone-Smith Trust	4.2
Equity Office Properties Trust	4.2
Public Storage, Inc.	4.1
Equity Residential	3.9
PORTFOLIO COMPOSITION
Common Stocks	98.9	%
Short-Term Paper	1.1

	Beginning Account Value		Ending Account Value		Expenses Paid During Period *
	06/01/06		11/30/06		06/01/06 – 11/30/06
Class A
Actual (27.69% return)	$	1,000.00	$	1,276.90	$	8.39
Hypothetical (5% annual return before expenses)	$	1,000.00	$	1,017.70	$	7.44
Class B
Actual (27.22% return)	$	1,000.00	$	1,272.20	$	12.65
Hypothetical (5% annual return before expenses)	$	1,000.00	$	1,013.94	$	11.21
Class C
Actual (27.17% return)	$	1,000.00	$	1,271.70	$	12.64
Hypothetical (5% annual return before expenses)	$	1,000.00	$	1,013.94	$	11.21
Class D
Actual (27.79% return)	$	1,000.00	$	1,277.90	$	6.97
Hypothetical (5% annual return before expenses)	$	1,000.00	$	1,018.95	$	6.17

NUMBER OF SHARES			VALUE
		Common Stocks (99.1%)
		Home Building (1.0%)
	47,050	Brookfield Homes Corp.	$	1,717,325
		Hospital/Nursing Management (0.6%)
	137,820	Tenet Healthcare Corp.*		977,144
		Hotels/Resorts/ Cruiselines (9.1%)
	4,817	Gaylord Entertainment Co.*		235,551
	159,354	Hilton Hotels Corp.		5,231,592
	88,380	Morgans Hotel Group Co.*		1,293,883
	131,910	Starwood Hotels & Resorts Worldwide, Inc.		8,464,665
				15,225,691
		Real Estate - Industrial/ Office (5.5%)
	229,362	Brookfield Properties Corp. (Canada)		9,208,884
		Real Estate - Retail (1.9%)
	53,790	Forest City Enterprises, Inc. (Class A)		3,133,805
		REIT - Diversified (2.4%)
	32,090	Vornado Realty Trust		4,046,870
		REIT - Healthcare (3.4%)
	15,950	Cogdell Spencer Inc.		348,986
	26,146	Health Care Property Investors, Inc.		948,315
	149,335	Senior Housing Properties Trust		3,267,450
	93,770	Sunrise Senior Living Real Estate Investment Trust (Canada)		825,570
	5,760	Universal Health Realty Income Trust		226,886
	1,300	Windrose Medical Properties Trust		24,336
				5,641,543
		REIT - Industrial/Office (19.8%)
	73,360	AMB Property Corp.		4,494,767
	93,089	Boston Properties, Inc.		10,896,067

NUMBER OF SHARES			VALUE
	41,177	Brandywine Realty Trust	$	1,447,372
	460	Douglas Emmett, Inc.*		12,098
	144,210	Equity Office Properties Trust		6,950,922
	7,710	Highwoods Properties, Inc.		314,568
	4,620	Kilroy Realty Corp.		377,916
	35,532	Liberty Property Trust		1,819,594
	64,592	Mack-Cali Realty Corp.		3,529,307
	480	Parkway Properties, Inc.		24,902
	32,195	ProLogis		2,098,148
	4,080	Reckson Associates Realty Corp.		197,390
	37,300	Republic Property Trust		429,323
	3,890	SL Green Realty Corp.		526,084
				33,118,458
		REIT - Lodging/Resorts (8.0%)
	25,529	Hersha Hospiltality Trust		294,605
	388,714	Host Hotels & Resorts Inc.		9,803,367
	150,690	Legacy Hotels REIT (Canada)		1,232,978
	98,495	Strategic Hotels & Resorts, Inc.		2,142,266
				13,473,216
		REIT - Residential (20.0%)
	20,835	American Campus Communities, Inc.		618,800
	116,061	Archstone-Smith Trust		6,961,339
	67,208	AvalonBay Communities, Inc.		8,944,041
	8,980	BRE Properties, Inc. (Class A)		580,467
	38,781	Equity Lifestyle Properties, Inc.		2,015,449
	123,703	Equity Residential		6,588,422
	40,277	Essex Property Trust, Inc.		5,318,175
	50,079	Post Properties, Inc.		2,395,779
				33,422,472
		REIT - Retail (22.0%)
	26,795	Acadia Realty Trust		696,134
	106,300	BPP Liquidating Trust††*		5,315
	17,700	Cedar Shopping Centers Inc.		322,848
	54,484	Federal Realty Investment Trust		4,640,947
	61,731	General Growth Properties, Inc.		3,391,501
	59,425	Macerich Co. (The)		5,079,055

NUMBER OF SHARES			VALUE
	5,300	Ramco-Gershenson Properties Trust	$	195,994
	72,250	Regency Centers Corp.		5,706,305
	154,099	Simon Property Group, Inc.		15,715,016
	19,586	Taubman Centers, Inc.		968,724
				36,721,839
		REIT - Specialty (1.3%)
	16,300	Centracore Properties Trust		523,556
	44,391	Plum Creek Timber Co., Inc.		1,654,009
				2,177,565
		REIT - Storage (4.1%)
	70,623	Public Storage, Inc.		6,799,582

PRINCIPAL AMOUNT IN THOUSANDS
		Short-Term Investment (1.1%)
		Repurchase Agreement
$	1,913	Joint repurchase agreement account 5.295% due 12/01/06 (dated 11/30/06; proceeds $1,913,281 (a) (cost $1,913,000)	1,913,000

Total Investments (Cost $81,199,508) (b)	100.2	%		167,577,394
Liabilities in Excess of Other Assets	(0.2	)		(331,616	)
Net Assets	100.0	%	$	167,245,778

INDUSTRY	VALUE		PERCENT OF NET ASSETS
REIT - Retail	$	36,721,839		22.0	%
REIT - Residential		33,422,472		20.0
REIT - Industrial/Office		33,118,458		19.8
Hotels/Resorts/Cruiselines		15,225,691		9.1
REIT - Lodging/Resorts		13,473,216		8.0
Real Estate - Industrial/ Office		9,208,884		5.5
REIT - Storage		6,799,582		4.1
REIT - Healthcare		5,641,543		3.4
REIT - Diversified		4,046,870		2.4
Real Estate - Retail		3,133,805		1.9
REIT - Specialty		2,177,565		1.3
Repurchase Agreement		1,913,000		1.1
Home Building		1,717,325		1.0
Hospital/Nursing Management		977,144		0.6
	$	167,577,394		100.2	%

Assets:
Investments in securities, at value (cost $81,199,508)	$	167,577,394
Receivable for:
Investments sold		218,815
Shares of beneficial interest sold		419,001
Dividends		121,339
Interest		281
Prepaid expenses and other assets		28,109
Total Assets		168,364,939
Liabilities:
Payable for:
Investments purchased		694,677
Shares of beneficial interest redeemed		139,578
Investment advisory fee		104,867
Distribution fee		97,131
Administration fee		10,487
Accrued expenses and other payables		72,421
Total Liabilities		1,119,161
Net Assets	$	167,245,778
Composition of Net Assets:
Paid-in-capital	$	54,021,893
Net unrealized appreciation		86,377,847
Dividends in excess of net investment income		(289,463	)
Accumulated undistributed net realized gain		27,135,501
Net Assets	$	167,245,778
Class A Shares:
Net Assets	$	37,021,771
Shares Outstanding (unlimited authorized, $.01 par value)		1,830,375
Net Asset Value Per Share	$	20.23
Maximum Offering Price Per Share, (net asset value plus 5.54% of net asset value)	$	21.35
Class B Shares:
Net Assets	$	94,389,591
Shares Outstanding (unlimited authorized, $.01 par value)		4,690,705
Net Asset Value Per Share	$	20.12
Class C Shares:
Net Assets	$	19,939,381
Shares Outstanding (unlimited authorized, $.01 par value)		990,921
Net Asset Value Per Share	$	20.12
Class D Shares:
Net Assets	$	15,895,035
Shares Outstanding (unlimited authorized, $.01 par value)		784,407
Net Asset Value Per Share	$	20.26

Net Investment Income: Income
Dividends (net of $36,580 foreign withholding tax)	$	2,822,299
Interest		114,552
Total Income		2,936,851
Expenses
Investment advisory fee		1,192,721
Distribution fee (Class A shares)		67,447
Distribution fee (Class B shares)		896,595
Distribution fee (Class C shares)		161,007
Transfer agent fees and expenses		246,740
Administration fee		119,272
Shareholder reports and notices		70,451
Professional fees		60,480
Registration fees		43,092
Custodian fees		23,960
Trustees' fees and expenses		1,985
Other		51,210
Total Expenses		2,934,960
Less: expense offset		(776	)
Net Expenses		2,934,184
Net Investment Income		2,667
Net Realized and Unrealized Gain: Net Realized Gain on:
Investments		27,486,432
Capital gain distributions received		1,402,285
Foreign exchange transactions		2,996
Net Realized Gain		28,891,713
Net Change in Unrealized Appreciation/Depreciation on:
Investments		20,575,360
Net translation of other assets and liabilities denominated in foreign currencies		(4,072	)
Net Appreciation		20,571,288
Net Gain		49,463,001
Net Increase	$	49,465,668

	FOR THE YEAR ENDED NOVEMBER 30, 2006			FOR THE YEAR ENDED NOVEMBER 30, 2005
Increase (Decrease) in Net Assets: Operations:
Net investment income	$	2,667		$	1,380,808
Net realized gain		28,891,713			49,127,660
Net change in unrealized appreciation		20,571,288			(9,760,418	)
Net Increase		49,465,668			40,748,050
Dividends and Distributions to Shareholders:
In excess of net investment income
Class A shares		(243,124	)		(181,905	)
Class B shares		(170,556	)		(328,887	)
Class C shares		(35,596	)		(53,654	)
Class D shares		(183,769	)		(918,009	)
From net realized gain
Class A shares		(6,132,120	)		(937,896	)
Class B shares		(24,565,285	)		(8,590,969	)
Class C shares		(4,014,619	)		(1,164,677	)
Class D shares		(4,147,979	)		(5,416,036	)
Total Dividends and Distributions		(39,493,048	)		(17,592,033	)
Net increase (decrease) from transactions in shares of beneficial interest		7,015,860			(85,285,545	)
Net Increase (Decrease)		16,988,480			(62,129,528	)
Net Assets:
Beginning of period		150,257,298			212,386,826
End of Period
(Including dividends in excess of net investment income of $289,463 and 85,032, $respectively)	$	167,245,778		$	150,257,298

	FOR THE YEAR ENDED NOVEMBER 30, 2006						FOR THE YEAR ENDED NOVEMBER 30, 2005
	SHARES			AMOUNT			SHARES			AMOUNT
CLASS A SHARES
Sold		588,190		$	10,256,641			348,655		$	6,249,309
Conversion from Class B		246,449			4,183,478			627,848			10,536,868
Reinvestment of dividends and distributions		391,852			5,895,996			58,038			1,008,323
Redeemed		(593,804	)		(10,173,008	)		(478,579	)		(8,430,720	)
Net increase — Class A		632,687			10,163,107			555,962			9,363,780
CLASS B SHARES
Sold		388,089			6,648,638			653,908			11,459,961
Conversion to Class A		(247,549	)		(4,183,478	)		(630,122	)		(10,536,868	)
Reinvestment of dividends and distributions		1,443,070			21,553,976			444,566			7,623,651
Redeemed		(1,738,876	)		(29,291,249	)		(2,203,171	)		(38,678,267	)
Net decrease — Class B		(155,266	)		(5,272,113	)		(1,734,819	)		(30,131,523	)
CLASS C SHARES
Sold		214,357			3,661,744			178,578			3,188,449
Reinvestment of dividends and distributions		247,254			3,696,926			64,322			1,103,967
Redeemed		(256,367	)		(4,375,470	)		(334,237	)		(5,845,680	)
Net increase (decrease) — Class C		205,244			2,983,200			(91,337	)		(1,553,264	)
CLASS D SHARES
Sold		186,284			3,127,111			283,870			4,911,964
Reinvestment of dividends and distributions		205,578			3,095,418			315,345			5,439,719
Redeemed		(418,301	)		(7,080,863	)		(3,874,438	)		(73,316,221	)
Net decrease — Class D		(26,439	)		(858,334	)		(3,275,223	)		(62,964,538	)
Net increase (decrease) in Fund		656,226		$	7,015,860			(4,545,417	)	$	(85,285,545	)

	FOR THE YEAR ENDED NOVEMBER 30, 2006			FOR THE YEAR ENDED NOVEMBER 30, 2005
Ordinary income	$	1,679,048		$	3,285,435
Long- term capital gains		37,814,000			14,306,598
Total distributions	$	39,493,048		$	17,592,033
As of November 30, 2006, the tax-basis components of accumulated earnings were as follows:
Undistributed ordinary income	$	343,924
Undistributed long-term gains		27,016,557
Net accumulated earnings		27,360,481
Temporary differences		(440	)
Net unrealized appreciation		85,863,844
Total accumulated earnings	$	113,223,885

DIVIDENDS IN EXCESS OF NET INVESTMENT INCOME				ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN				PAID-IN-CAPITAL
$	425,947			$	(394,886	)		$	(31,061	)

	FOR THE YEAR ENDED NOVEMBER 30,
	2006			2005			2004			2003			2002
Class A Shares
Selected Per Share Data:
Net asset value, beginning of period	$	19.72		$	17.47		$	13.58		$	10.59		$	11.39
Income (loss) from investment operations:
Net investment income‡		0.08			0.19			0.17			0.32			0.29
Net realized and unrealized gain (loss)		5.73			3.60			4.29			3.20			(0.17	)
Total income from investment operations		5.81			3.79			4.46			3.52			0.12
Less dividends and distributions:
From net investment income		–			(0.20	)		(0.18	)		(0.32	)		(0.28	)
In excess of net investment income		(0.17	)		–			–			–			–
From net realized gain		(5.13	)		(1.34	)		(0.39	)		(0.21	)		(0.64	)
Total dividends and distributions		(5.30	)		(1.54	)		(0.57	)		(0.53	)		(0.92	)
Net asset value, end of period	$	20.23		$	19.72		$	17.47		$	13.58		$	10.59
Total Return†		39.68	%		23.11	%		33.84	%		34.61	%		0.88	%
Ratios to Average Net Assets⁽¹⁾:
Total expenses (before expense offset)		1.45	%		1.50	%		1.62	%		1.62	%		1.63	%
Net investment income		0.51	%		1.04	%		1.21	%		2.77	%		2.52	%
Supplemental Data:
Net assets, end of period, in thousands	$	37,022		$	23,622		$	11,210		$	7,378		$	6,401
Portfolio turnover rate		20	%		21	%		14	%		23	%		28	%

	FOR THE YEAR ENDED NOVEMBER 30,
	2006			2005			2004			2003			2002
Class B Shares
Selected Per Share Data:
Net asset value, beginning of period	$	19.64		$	17.40		$	13.53		$	10.55		$	11.36
Income (loss) from investment operations:
Net investment income‡		(0.04	)		0.05			0.07			0.24			0.20
Net realized and unrealized gain (loss)		5.69			3.59			4.26			3.19			(0.17	)
Total income from investment operations		5.65			3.64			4.33			3.43			0.03
Less dividends and distributions:
From net investment income		–			(0.06	)		(0.07	)		(0.24	)		(0.20	)
In excess of net investment income		(0.04	)		–			–			–			–
From net realized gain		(5.13	)		(1.34	)		(0.39	)		(0.21	)		(0.64	)
Total dividends and distributions		(5.17	)		(1.40	)		(0.46	)		(0.45	)		(0.84	)
Net asset value, end of period	$	20.12		$	19.64		$	17.40		$	13.53		$	10.55
Total Return†		38.56	%		22.18	%		32.81	%		33.64	%		0.15	%
Ratios to Average Net Assets⁽¹⁾:
Total expenses (before expense offset)		2.21	%		2.26	%		2.38	%		2.37	%		2.38	%
Net investment income		(0.24	)%		0.28	%		0.45	%		2.02	%		1.77	%
Supplemental Data:
Net assets, end of period, in thousands	$	94,390		$	95,184		$	114,483		$	108,680		$	95,343
Portfolio turnover rate		20	%		21	%		14	%		23	%		28	%

	FOR THE YEAR ENDED NOVEMBER 30,
	2006			2005			2004			2003			2002
Class C Shares
Selected Per Share Data:
Net asset value, beginning of period	$	19.64		$	17.40		$	13.53		$	10.55		$	11.36
Income (loss) from investment operations:
Net investment income‡		(0.04	)		0.06			0.06			0.23			0.20
Net realized and unrealized gain (loss)		5.70			3.59			4.27			3.20			(0.17	)
Total income from investment operations		5.66			3.65			4.33			3.43			0.03
Less dividends and distributions:
From net investment income		–			(0.07	)		(0.07	)		(0.24	)		(0.20	)
In excess of net investment income		(0.05	)		–			–			–			–
From net realized gain		(5.13	)		(1.34	)		(0.39	)		(0.21	)		(0.64	)
Total dividends and distributions		(5.18	)		(1.41	)		(0.46	)		(0.45	)		(0.84	)
Net asset value, end of period	$	20.12		$	19.64		$	17.40		$	13.53		$	10.55
Total Return†		38.63	%		22.24	%		32.83	%		33.54	%		0.15	%
Ratios to Average Net Assets⁽¹⁾:
Total expenses (before expense offset)		2.18	%		2.23	%		2.38	%		2.37	%		2.38	%
Net investment income		(0.22	)%		0.31	%		0.45	%		2.02	%		1.77	%
Supplemental Data:
Net assets, end of period, in thousands	$	19,939		$	15,434		$	15,261		$	12,359		$	9,129
Portfolio turnover rate		20	%		21	%		14	%		23	%		28	%

	For		Withhold		Abstain		BNV*
Frank L. Bowman		4,294,383		205,664		0		0
Kathleen A. Dennis		4,298,692		201,355		0		0
James F. Higgins		4,303,969		196,078		0		0
Joseph J. Kearns		4,300,596		199,451		0		0
Michael F. Klein		4,302,345		197,702		0		0
W. Allen Reed		4,288,949		211,098		0		0
Fergus Reid		4,298,313		201,734		0		0

	For		Against		Abstain		BNV*
Elimination of the fundamental policy restricting purchases of securities on margin		3,587,835		160,487		174,202		577,523
Elimination of the fundamental policy prohibiting investments in oil, gas, and other types of minerals or mineral leases		3,607,452		142,508		172,564		577,523
Elimination of the fundamental policy prohibiting investments for purposes of exercising control		3,607,520		146,837		168,167		577,523

/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
January 18, 2007