ALLIANCE REAL ESTATE INVESTMENT FUND
ANNUAL REPORT
AUGUST 31, 1998
ALLIANCE CAPITAL
LETTER TO SHAREHOLDERS ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
October 28, 1998
Dear Shareholder:
This annual report provides an update on the performance and investment
activity of the Alliance Real Estate Investment Fund (the "Fund") for the six
and 12-month periods ended August 31, 1998.
INVESTMENT RESULTS
Publicly traded companies that own income producing real estate underwent a
strong correction in the six months ended August 31, 1998. This market, as
measured by the NAREIT Equity Index, suffered a 17.76% decline during this
period. This more than offset respectable first half results, leaving the full
fiscal year down 11.04% for the Fund's benchmark index. As the accompanying
table shows, your Fund, its benchmark, and the overall stock market as
represented by the S&P 500, all performed poorly during the six-month period
ended August 31, 1998.
The overall stock market was down as a result of fears of a possible recession.
The REIT market was caught in a downdraft caused by investors focusing on
larger blue chip stocks as a perceived "flight to safety." Your Fund, which was
overweight in the hotel and office property sectors of the REIT market,
underperformed its benchmark because these two sectors were harder hit in the
stock market than other sectors of real estate. Even though these two sectors
of the REIT market were down during the period under review, we continue to
believe that the underlying real estate fundamentals of the market continue to
be positive for the overall REIT market and for these two sectors, in
particular.
INVESTMENT RESULTS*
Periods Ended August 31, 1998
TOTAL RETURNS
6 MONTHS 12 MONTHS
-------- ---------
ALLIANCE REAL ESTATE
INVESTMENT FUND
Class A -21.52% -14.90%
Class B -21.80% -15.56%
Class C -21.80% -15.56%
S&P 500 STOCK INDEX -8.07% 8.12%
NAREIT EQUITY INDEX -17.76% -11.04%
* TOTAL RETURNS ARE BASED ON THE NET ASSET VALUE OF EACH CLASS OF SHARES AS
OF AUGUST 31, 1998. ALL FEES AND EXPENSES RELATED TO THE OPERATION OF THE FUND
HAVE BEEN DEDUCTED, BUT NO ADJUSTMENT HAS BEEN MADE FOR SALES CHARGES THAT MAY
APPLY WHEN SHARES ARE PURCHASED OR REDEEMED. TOTAL RETURN FOR ADVISOR CLASS
SHARES WILL DIFFER DUE TO DIFFERENT EXPENSES CHARGED TO THAT CLASS. PAST
PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
THE S&P 500 STOCK INDEX IS AN UNMANAGED INDEX OF 500 U.S. COMPANIES AND IS
A COMMON MEASURE OF THE PERFORMANCE OF THE OVERALL U.S. STOCK MARKET. THE
NATIONAL ASSOCIATION OF REAL ESTATE INVESTMENT TRUSTS EQUITY INDEX (NAREIT) IS
A MARKET VALUE WEIGHTED INDEX BASED UPON THE LAST CLOSING PRICE OF THE MONTH
FOR TAX-QUALIFIED REITS LISTED ON THE NYSE, AMEX AND THE NASDAQ. AN INVESTOR
CANNOT INVEST DIRECTLY IN THESE INDICES. INDEX RETURNS ARE NOT ADJUSTED FOR
SALES CHARGES OR OPERATING EXPENSES.
ADDITIONAL INVESTMENT RESULTS APPEAR ON PAGE 3.
MARKET OVERVIEW
The recent steep decline of real estate companies' stock prices is almost
unprecedented. The last time the benchmark index showed such a precipitous
six-month decline was in the midst of the recession of 1973-1974. At that time,
the U.S. economy was reeling from the first global oil shocks, increasing
competition from Europe and Japan, and slowing productivity brought on by the
entrance of the baby boom generation into the work force. Real estate markets
were at the tail end of a vast construction cycle which was financed largely by
bank (and mortgage REIT) debt.
By comparison, the U.S. economy is one of the strongest growth engines in the
world today. Although financial turmoil in Asia and Russia will likely slow
U.S. growth prospects, it is not at all clear that we are headed into a
recession at this point. Lately, some new construction has begun. Whether or
not this turns into a full fledged cycle remains to be seen. Arguably, real
estate markets are broadly in equilibrium. As a result, solid rent growth seems
likely for most owners of real estate for the foreseeable future. This should
bode well for the companies held in your Fund's portfolio.
1
ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
In fact, the average real estate company is posting excellent profit growth. We
anticipate 13.5% and 11.0% growth for the average REIT in 1998 and 1999,
respectively. These expectations are based on properties already owned or under
development and market conditions, more or less, as they currently exist.
Valuation levels are at historic lows. The average REIT trades at about 9.5
times 1998 funds from operations (the REIT equivalent of earnings per share), a
10-15% discount to the value of the real estate assets that it owns, and with a
7.7% current dividend yield.
These valuation metrics suggest either a severe real estate pullback or stock
market over-reaction. We believe it is the latter of these alternatives. We
track real estate market supply and demand changes very closely. Our research
shows that supply is undeniably increasing, albeit slowly, and demand growth is
slowing. However, the balance has not yet tipped toward the negative. In fact,
capital market turmoil appears to be preventing real estate markets from
overheating. This should allow company growth to continue and share prices to
recover from recent lows.
INVESTMENT STRATEGY
Your Fund was designed to identify and invest in companies that have the
optimal exposure to the country's strongest real estate markets and which will
benefit most from the significant shifts in real estate financing and ownership
which are sweeping across the United States today.
The most economically sensitive part of the real estate world is hotels. This
is because supply is relatively easy to build, demand is closely linked to
Gross Domestic Product growth and rental rates reprice every day. We have
lowered our portfolio exposure to hotels by 20% in the past six months. We have
increased our exposure to downtown office companies by 50% in the past six
months. Long lease terms cushion economic downturns because rent is a
contractual obligation which must be paid even during periods of business
softness. Downtown office buildings have the longest lease terms in the REIT
world. New supply is more constrained in the northeastern U.S. because of
population density and bureaucratic logjams. To minimize supply risk, we
increased our exposure to the northeast by 22% in the past six months.
MARKET OUTLOOK AND CONCLUSIONS
Our outlook for real estate remains positive. Supply of, and demand for, space
remains roughly in balance in most markets. We believe the market has
overreacted to the beginning of a normal construction cycle and slowing
economic growth. The widespread weakness of the U.S. stock market has damaged
REIT shares even though the fundamentals do not justify such weakness. As a
result, we are optimistic about both near and long term results. We believe we
are well positioned for any coming rebound in real estate stocks.
In conclusion, we would like to thank you for the continued confidence you have
shown in the Alliance Real Estate Investment Fund.
Sincerely,
John D. Carifa
Chairman and President
Daniel G. Pine
Senior Vice President
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
2
INVESTMENT OBJECTIVE AND POLICIES ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
Alliance Real Estate Investment Fund seeks a total return on its assets from
long-term growth of capital and from income principally through investing in a
portfolio of equity securities of issuers that are primarily engaged in or
related to the real estate industry.
INVESTMENT RESULTS
_______________________________________________________________________________
NAV AND SEC TOTAL RETURNS AS OF AUGUST 31, 1998
CLASS A SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
1 Year -14.90% -18.52%
Since Inception* 6.35% 3.99%
CLASS B SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
1 Year -15.56% -18.83%
Since Inception* 5.60% 4.10%
CLASS C SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
1 Year -15.56% -16.38%
Since Inception* 5.60% 5.60%
SEC AVERAGE TOTAL RETURNS AS OF THE MOST RECENT QUARTER-END (JUNE 30, 1998)
CLASS A CLASS B CLASS C
------- ------- -------
1 Year 2.76% 2.61% 5.52%
Since Inception* 17.09% 17.71% 19.17%
The Fund's investment results represent total returns. The NAV and SEC returns
reflect reinvestment of dividends and/or capital gains distributions in
additional shares, without (NAV) and with (SEC) the effect of the 4.25% maximum
front-end sales charge for Class A shares or applicable contingent deferred
sales charge for Class B shares (4% year 1, 3% year 2, 2% year 3, 1% year 4);
and for Class C shares (1% year 1). Returns for Class A shares do not reflect
the imposition of the 1-year 1% contingent deferred sales charge for accounts
over $1,000,000. Total return for Advisor Class shares will differ due to
different expenses associated with that class.
Past performance does not guarantee future results. Investment return and
principal value will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
* Inception: 10/1/96 for all share Classes.
3
ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
ALLIANCE REAL ESTATE INVESTMENT FUND
GROWTH OF A $10,000 INVESTMENT
9/30/96* TO 8/31/98
$15,000
$14,000
$13,000
$12,000
$11,000
$10,000
$ 9,000
S&P 500: $14,395
NAREIT INDEX: $11,494
REAL ESTATE INVESTMENT FUND CLASS A: $10,780
9/30/96 8/31/97 8/31/98
This chart illustrates the total value of an assumed $10,000 investment in
Alliance Real Estate Investment Fund Class A shares (from 9/30/96 to 8/31/98)
as compared to the performance of an appropriate broad-based index. The chart
reflects the deduction of the maximum 4.25% sales charge from the initial
$10,000 investment in the Fund and assumes the reinvestment of dividends and
capital gains. Performance for Class B, Class C and Advisor Class shares will
vary from the results shown above due to differences in expenses charged to
those classes. Past performance is not indicative of future results, and is not
representative of future gain or loss in capital value or dividend income.
The unmanaged Standard &Poor's 500 Stock Index includes 500 U.S. stocks and is
a common measure of the performance of the overall U.S. stock market.
The unmanaged NAREIT Index is a market value weighted index, based upon the
last closing price of the month for tax-qualified REITs listed on the NYSE,
AMEX and the NASDAQ.
When comparing Alliance Real Estate Investment Fund to the indices shown above,
you should note that no charges or expenses are reflected in the performance of
the indices.
Real Estate Investment Fund
S&P 500 Stock Index
NAREIT Index
* Month-end nearest to Fund's inception date of 10/1/96.
4
TEN LARGEST HOLDINGS
AUGUST 31, 1998 ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
PERCENT OF
COMPANY VALUE NET ASSETS
- -------------------------------------------------------------------------------
Starwood Hotels & Resorts $ 19,348,650 4.9%
Equity Office Properties Trust 18,007,545 4.6
SL Green Realty Corp. 16,468,375 4.2
Avalon Bay Communities, Inc. 16,048,758 4.1
Glenborough Realty Trust, Inc. 15,431,625 3.9
Essex Property Trust, Inc. 15,302,219 3.9
Pan Pacific Retail Properties, Inc. 15,061,988 3.8
Spieker Properties, Inc. 14,822,450 3.8
Public Storage, Inc. 14,702,875 3.8
Arden Realty, Inc. 13,456,625 3.4
$158,651,110 40.4%
MAJOR PORTFOLIO CHANGES
SIX MONTHS ENDED AUGUST 31, 1998
_______________________________________________________________________________
SHARES*
HOLDINGS
PURCHASES BOUGHT 8/31/98
- -------------------------------------------------------------------------------
Avalon Bay Communities, Inc. 204,926 486,326
Boston Properties, Inc. 50,700 256,300
Brookfield Properties Corp. 754,000 754,000
Cabot Industrial Trust 234,200 517,300
Correctional Properties Trust 473,500 473,500
Mack-Cali Realty Corp. 45,000 419,800
MeriStar Hospitality Corp. 405,223 405,223
SL Green Realty Corp. 138,900 855,500
Starwood Hotels & Resorts 99,400 530,100
Vornado Realty Trust 286,300 286,300
HOLDINGS
SALES SOLD 8/31/98
- -------------------------------------------------------------------------------
American General Hospitality Corp. 443,600 -0-
Avalon Properties, Inc. 410,700 -0-
Crescent Operating, Inc. 33,900 -0-
Duke Realty Investments, Inc. 57,700 411,700
Excel Realty Trust, Inc. 35,000 350,200
Golf Trust of America, Inc. 105,400 338,600
Highwoods Properties, Inc. 25,700 456,800
IRT Property Co. 512,100 -0-
Macerich Co. 30,000 481,500
Meridian Industrial Trust, Inc. 352,400 -0-
* Adjusted for stock mergers and other corporate actions.
5
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1998 ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
COMPANY SHARES VALUE
- -------------------------------------------------------------------------
COMMON STOCKS & OTHER INVESTMENTS-99.0%
REAL ESTATE INVESTMENT TRUSTS-96.6%
APARTMENTS-11.2%
Archstone Communities Trust 653,400 $ 12,659,625
Avalon Bay Communities, Inc. 486,326 16,048,758
Essex Property Trust, Inc. 538,100 15,302,219
------------
44,010,602
DIVERSIFIED-12.2%
Correctional Properties Trust 473,500 6,747,375
Entertainment Properties Trust 518,600 7,714,175
Glenborough Realty Trust, Inc. 709,500 15,431,625
Golf Trust of America, Inc. 338,600 8,972,900
Vornado Realty Trust 286,300 8,982,662
------------
47,848,737
HOTELS & RESTAURANTS-12.9%
Innkeepers USA Trust 798,400 7,684,600
MeriStar Hospitality Corp. 405,223 6,838,138
Patriot American Hospitality, Inc. 761,000 10,273,500
Starwood Hotels & Resorts 530,100 19,348,650
Sunstone Hotel Investors, Inc. 747,100 6,350,350
------------
50,495,238
OFFICE-20.5%
Arden Realty, Inc. 637,000 13,456,625
Boston Properties, Inc. 256,300 7,320,569
Crescent Real Estate Equities Co. 566,000 13,018,000
Equity Office Properties Trust 793,721 18,007,545
Mack-Cali Realty Corp. 419,800 12,095,488
SL Green Realty Corp. 855,500 16,468,375
------------
80,366,602
OFFICE - INDUSTRIAL MIX-16.5%
Brandywine Realty Trust 673,800 12,128,400
Duke Realty Investments, Inc. 411,700 8,542,775
Great Lakes REIT, Inc. 317,600 4,823,550
Highwoods Properties, Inc. 456,800 11,619,850
Reckson Associates Realty Corp. 592,900 12,710,294
Spieker Properties, Inc. 416,800 14,822,450
------------
64,647,319
REGIONAL MALLS-5.7%
Macerich Co. 481,500 12,157,875
Mills Corp. 530,800 10,284,250
------------
22,442,125
SHOPPING CENTERS-8.2%
Burnham Pacific Properties, Inc. 84,500 1,098,500
Excel Realty Trust, Inc. 350,200 8,185,925
Pacific Retail Trust (a) 591,577 7,690,501
Pan Pacific Retail Properties, Inc. 819,700 15,061,988
------------
32,036,914
STORAGE-3.7%
Public Storage, Inc. 629,000 14,702,875
WAREHOUSE & INDUSTRIAL-5.7%
Cabot Industrial Trust 517,300 9,634,713
ProLogis Trust 646,100 12,922,000
Security Capital Group, Inc.,
warrants, expiring 9/18/98 (b) 20,993 451
------------
22,557,164
------------
379,107,576
6
ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
COMPANY SHARES VALUE
- -------------------------------------------------------------------------
REAL ESTATE DEVELOPMENT & MANAGEMENT-2.4%
Brookfield Properties Corp. (c) 754,000 $ 8,194,604
Excel Legacy Corp. (b) 155,800 443,056
Reckson Services Industries, Inc. (b) 293,032 824,152
------------
9,461,812
Total Common Stocks & Other Investments
(cost $481,805,541) 388,569,388
PRINCIPAL
AMOUNT
COMPANY (000) VALUE
- -------------------------------------------------------------------------
COMMERCIAL PAPER-1.3%
American Express Credit Corp.
5.44%, 9/01/98 $1,600 $ 1,600,000
Prudential Funding Corp.
5.60%, 9/02/98 3,400 3,399,471
Total Commercial Paper
(amortized cost $4,999,471) 4,999,471
TOTAL INVESTMENTS-100.3%
(cost $486,805,012) 393,568,859
Other assets less liabilities-(0.3%) (1,024,664)
NET ASSETS-100% $ 392,544,195
(a) Illiquid security, valued at fair value (see Note A).
(b) Non-income producing security.
(c) Canadian holding.
See notes to financial statements.
7
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1998 ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
ASSETS
Investments in securities, at value (cost $486,805,012) $ 393,568,859
Cash 18,868
Receivable for investment securities sold 1,508,744
Receivable for capital stock sold 885,211
Dividends receivable 405,790
Deferred organizational expenses 187,850
Total assets 396,575,322
LIABILITIES
Payable for capital stock redeemed 2,906,558
Distribution fee payable 338,715
Advisory fee payable 338,198
Accrued expenses 447,656
Total liabilities 4,031,127
NET ASSETS $ 392,544,195
COMPOSITION OF NET ASSETS
Capital stock, at par $ 375,869
Additional paid-in capital 478,575,618
Undistributed net investment income 479,529
Accumulated net realized gain on investments and foreign
currency transactions 6,349,332
Net unrealized depreciation of investments (93,236,153)
$ 392,544,195
CALCULATION OF MAXIMUM OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($51,214,136/4,893,355 shares of capital stock
issued and outstanding) $10.47
Sales charge--4.25% of public offering price .46
Maximum offering price $10.93
CLASS B SHARES
Net asset value and offering price per share
($268,856,345/25,754,599 shares of capital stock
issued and outstanding) $10.44
CLASS C SHARES
Net asset value and offering price per share
($69,574,592/6,662,214 shares of capital stock
issued and outstanding) $10.44
ADVISOR CLASS SHARES
Net asset value, redemption and offering price per share
($2,899,122/276,690 shares of capital stock
issued and outstanding) $10.48
See notes to financial statements.
8
STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 1998 ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
INVESTMENT INCOME
Dividends (net of foreign taxes withheld
of $7,144) $ 22,876,767
Interest 581,741 $ 23,458,508
EXPENSES
Advisory fee 3,938,272
Distribution fee - Class A 180,477
Distribution fee - Class B 3,001,541
Distribution fee - Class C 739,194
Transfer agency 736,953
Registration 236,887
Custodian 137,512
Printing 124,212
Administrative 124,000
Audit and legal 98,750
Amortization of organization expenses 60,955
Directors' fees 33,000
Miscellaneous 21,359
Total expenses 9,433,112
Net investment income 14,025,396
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain on investment transactions 6,501,775
Net realized loss on foreign currency
transactions (13,650)
Net change in unrealized appreciation of
investments (113,565,407)
Net loss on investments and foreign currency
transactions (107,077,282)
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (93,051,886)
See notes to financial statements.
9
STATEMENT OF CHANGES IN NET ASSETS ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
YEAR ENDED OCT. 1, 1996(A)
AUG. 31, TO
1998 AUG. 31, 1997
------------- -------------
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income $ 14,025,396 $ 2,614,208
Net realized gain on investments and
foreign currency transactions 6,488,125 1,286,847
Net change in unrealized appreciation
of investments (113,565,407) 20,329,254
Net increase (decrease) in net assets
from operations (93,051,886) 24,230,309
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class A (2,204,713) (501,561)
Class B (9,402,948) (1,712,066)
Class C (2,290,119) (364,420)
Advisor Class (133,960) (36,161)
Net realized gain on investments
Class A (39,960) -0-
Class B (201,260) -0-
Class C (44,722) -0-
Advisor Class (2,319) -0-
Tax return of capital (see Note A)
Class A -0- (136,668)
Class B -0- (649,850)
Class C -0- (130,319)
Advisor Class -0- (2,718)
CAPITAL STOCK TRANSACTIONS
Net increase 230,444,209 248,675,027
Total increase 123,072,322 269,371,573
NET ASSETS
Beginning of period 269,471,873 100,300
End of period (including undistributed net
investment income of $479,529 at
August 31, 1998) $ 392,544,195 $ 269,471,873
(a) Commencement of operations.
See notes to financial statements.
10
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998 ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
Alliance Real Estate Investment Fund, Inc. (the "Fund") was incorporated in the
state of Maryland on July 15, 1996 as a diversified, open-end management
investment company. Prior to commencement of operations on October 1, 1996, the
Fund had no operations other than the sale to Alliance Capital Management L.P.
(the "Adviser") of 10 shares each of Class A, Class B and Class C and 10,000
shares of Advisor Class for the aggregate amount of $100 each on Class A, Class
B and Class C shares and $100,000 on the Advisor Class shares on August 22,
1996. The Fund offers Class A, Class B, Class C and Advisor Class shares. Class
A shares are sold with a front-end sales charge of up to 4.25% for purchases
not exceeding $1,000,000. With respect to purchases of $1,000,000 or more,
Class A shares redeemed within one year of purchase will be subject to a
contingent deferred sales charge of 1%. Class B shares are currently sold with
a contingent deferred sales charge which declines from 4% to zero depending on
the period of time the shares are held. Class B shares will automatically
convert to Class A shares eight years after the end of the calendar month of
purchase. Class C shares are subject to a contingent deferred sales charge of
1% on redemptions made within the first year after purchase. Advisor Class
shares are sold without an initial or contingent deferred sales charge and are
not subject to ongoing distribution expenses. Advisor Class shares are offered
to investors participating in fee based programs and to certain retirement plan
accounts. All four classes of shares have identical voting, dividend,
liquidation and other rights, except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan. The following is a summary of significant accounting
policies followed by the Fund.
1. SECURITY VALUATION
Portfolio securities traded on a national securities exchange or on a foreign
securities exchange (other than foreign securities exchanges whose operations
are similar to those of the United States over-the-counter market) are
generally valued at the last reported sales price or if no sale occurred, at
the mean of the closing bid and asked prices of that day. Readily marketable
securities traded in the over-the-counter market, securities listed on a
foreign securities exchange whose operations are similar to the U.S.
over-the-counter market, and securities listed on a national securities
exchange whose primary market is believed to be over-the-counter, are valued at
the mean of the current bid and asked prices. U.S. government and fixed income
securities which mature in 60 days or less are valued at amortized cost, unless
this method does not represent fair value. Securities for which current market
quotations are not readily available are valued at their fair value as
determined in good faith by, or in accordance with procedures adopted by, the
Board of Directors. Fixed income securities may be valued on the basis of
prices obtained from a pricing service when such prices are believed to reflect
the fair market value of such securities.
2. CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies and commitments under
forward exchange currency contracts are translated into U.S. dollars at the
mean of the quoted bid and asked price of such currencies against the U.S.
dollar. Purchases and sales of portfolio securities are translated into U.S.
dollars at the rates of exchange prevailing when such securities were acquired
or sold. Income and expenses are translated into U.S. dollars at rates of
exchange prevailing when accrued.
Net realized foreign exchange gains and losses represent foreign exchange gains
and losses from sales and maturities of debt securities and forward currency
exchange contracts, holding of foreign currencies, exchange gains or losses
realized between the trade and settlement dates on security transactions, and
the difference between the amounts of dividends, interest and foreign taxes
receivable recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net currency gains and losses from valuing foreign
currency denominated assets and liabilities at year end exchange rates are
reflected as a component of net unrealized appreciation (depreciation) of
investments and foreign currency denominated assets and liabilities.
3. TAXES
It is the Fund's policy to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gains, if any, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
11
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
4. ORGANIZATION EXPENSES
Organization costs of $304,750 have been deferred and are being amortized on a
straight-line basis through October, 2001.
5. INVESTMENT INCOME AND INVESTMENT TRANSACTIONS
Dividend income is recorded on the ex-dividend date. Interest income is accrued
daily. Investment transactions are accounted for on the date the securities are
purchased or sold. Investment gains and losses are determined on the identified
cost basis. The Fund accretes discounts as adjustments to interest income.
6. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities at
August 31, 1998 and the reported amounts of income and expenses during the
period. Actual results could differ from those estimates.
Significant estimates may include the classification of distributions received
by the Fund from the issuers of the Fund's portfolio securities. These
distributions may be classified as either dividend income, capital gains or as
non-taxable distributions. The final classifications of these distributions
cannot be determined until reported to the Fund by the issuers of the Fund's
portfolio securities, which normally occurs in January after the end of the
calendar year. Reclassification of distributions made to the Fund will not
affect the net assets of the Fund. The reclassification of distributions
received by the Fund may require the Fund to reclassify a portion of its
distributions to Fund shareholders.
7. INCOME AND EXPENSES
All income earned and expenses incurred by the Fund are borne on a pro-rata
basis by each outstanding class of shares, based on the proportionate interest
in the Fund represented by the shares of such class, except that the Fund's
Class B and Class C shares bear higher distribution and transfer agent fees
than Class A shares and Advisor Class shares (Advisor Class shares have no
distribution fees).
8. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Income and capital gains distributions are determined in accordance with
federal tax regulations and may differ from those determined in accordance with
generally accepted accounting principles. To the extent these differences are
permanent, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences, do not require such
reclassification. During the current fiscal year, permanent differences,
primarily due to book/tax differences, resulting from the Fund's investments in
Real Estate Investment Trusts and tax classifications of distributions,
resulted in an increase in undistributed net investment income and additional
paid-in capital and a corresponding decrease in accumulated net realized gain
on investments and foreign currency transactions. This reclassification had no
affect on net assets.
NOTE B: ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of an Investment Advisory Agreement, the Fund pays Alliance
Capital Management L.P. (the "Adviser") a monthly fee equal to the annualized
rate of .90 of 1% of the average daily net assets of the Fund. Such fee is
accrued daily and paid monthly.
Pursuant to the advisory agreement, the Fund paid $124,000 to the Adviser
representing the cost of certain legal and accounting services provided to the
Fund by the Adviser for the year ended August 31, 1998.
The Fund compensates Alliance Fund Services, Inc. (a wholly-owned subsidiary of
the Adviser) under a Transfer Agency Agreement for providing personnel and
facilities to perform transfer agency services for the Fund. Such compensation
amounted to $346,559 for the year ended August 31, 1998.
Alliance Fund Distributors, Inc. (a wholly-owned subsidiary of the Adviser)
serves as the Distributor of the Fund's shares. The Distributor received
front-end sales charges of $53,582 from the sale of Class A shares and $16,320,
$870,357 and $70,432 in contingent deferred
12
ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
sales charges imposed upon redemptions by shareholders of Class A, Class B and
Class C shares, respectively, for the year ended August 31, 1998.
Brokerage commissions paid for the year ended August 31, 1998 on investment
transactions amounted to $811,574, none of which was paid to brokers utilizing
the services of the Pershing Division of Donaldson, Lufkin & Jenrette
Securities Corp. ("DLJ") nor to DLJ directly, an affiliate of the Adviser.
NOTE C: DISTRIBUTION SERVICES AGREEMENT
The Fund has adopted a Distribution Services Agreement (the "Agreement")
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the
Agreement, the Fund pays a distribution fee to the Distributor at an annual
rate of up to .30 of 1% of the Fund's average daily net assets attributable to
Class A shares and 1% of the average daily net assets attributable to both
Class B and Class C shares. There is no distribution fee on the Advisor Class
shares. Such fee is accrued daily and paid monthly. The Agreement provides that
the Distributor will use such payments in their entirety for distribution
assistance and promotional activities. The Distributor has incurred expenses in
excess of the distribution costs reimbursed by the Fund in the amount of
$12,995,878 and $699,723, for Class B and C shares, respectively. Such costs
may be recovered from the Fund in future periods so long as the Agreement is in
effect. In accordance with the Agreement there is no provision for recovery of
unreimbursed distribution costs incurred by the Distributor, beyond the current
fiscal year for Class A shares. The Agreement also provides that the Adviser
may use its own resources to finance the distribution of the Fund's shares.
NOTE D: INVESTMENT TRANSACTIONS
Purchases and sales of investment securities, (excluding short-term investments
and U.S. government or government agency obligations) aggregated $332,919,506
and $97,529,926, respectively, for the year ended August 31, 1998. There were
no purchases or sales of U.S. government or government agency obligations for
the year ended August 31, 1998.
At August 31, 1998, the cost of investments for federal income tax purposes was
substantially the same as the cost for financial reporting purposes.
Accordingly, gross unrealized appreciation of investments was $522,330 and
gross unrealized depreciation of investments was $93,873,590 resulting in net
unrealized depreciation of $93,351,260 (excluding foreign currency
transactions).
13
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
NOTE E: CAPITAL STOCK
There are 12,000,000,000 shares of $0.01 par value capital stock authorized,
divided into four classes, designated Class A, Class B, Class C and Advisor
Class shares. Each consists of 3,000,000,000 authorized shares. Transactions in
capital stock were as follows:
SHARES AMOUNT
--------------------------- ------------------------------
YEAR ENDED OCT. 1, 1996(A) YEAR ENDED OCT. 1, 1996(A)
AUG. 31, TO AUG. 31, TO
1998 AUG. 31, 1997 1998 AUG. 31, 1997
------------- ------------ -------------- --------------
CLASS A
Shares sold 4,031,794 3,343,396 $ 54,670,681 $ 39,083,265
Shares issued in
reinvestment of
dividends and
distributions 107,045 31,254 1,392,487 372,824
Shares converted
from Class B 36,683 21,667 457,491 260,423
Shares redeemed (2,222,402) (456,092) (28,964,016) (5,480,852)
Net increase 1,953,120 2,940,225 $ 27,556,643 $ 34,235,660
CLASS B
Shares sold 16,336,188 15,390,867 $ 221,327,921 $ 182,254,693
Shares issued in
reinvestment of
dividends and
distributions 328,979 88,493 4,276,970 1,059,667
Shares converted
to Class A (36,750) (21,686) (457,491) (260,423)
Shares redeemed (5,480,259) (851,243) (70,036,664) (10,405,233)
Net increase 11,148,158 14,606,431 $ 155,110,736 $ 172,648,704
CLASS C
Shares sold 5,180,658 3,538,401 $ 70,280,469 $ 42,219,026
Shares issued in
reinvestment of
dividends and
distributions 63,778 13,053 824,321 156,346
Shares redeemed (1,922,771) (210,915) (24,674,279) (2,552,750)
Net increase 3,321,665 3,340,539 $ 46,430,511 $ 39,822,622
ADVISOR CLASS
Shares sold 207,950 198,970 $ 2,825,619 $ 2,322,671
Shares issued in
reinvestment of
dividends and
distributions 8,017 3,112 105,015 37,140
Shares redeemed (119,760) (31,599) (1,584,315) (391,770)
Net increase 96,207 170,483 $ 1,346,319 $ 1,968,041
NOTE F: BANK BORROWING
A number of open-end mutual funds managed by the Adviser, including the Fund,
participate in a $750 million revolving credit facility (the "Facility") to
provide short-term financing if necessary, subject to certain restrictions in
connection with abnormal redemption activity. Commitment fees related to the
Facility are paid by the participating funds and are included in the
miscellaneous expenses in the statement of operations. The Fund did not utilize
the Facility during the year ended August 31, 1998.
(a) Commencement of operations.
14
FINANCIAL HIGHLIGHTS ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
CLASS A
----------------------------
YEAR ENDED OCT. 1, 1996(A)
AUG. 31, TO
1998 AUG. 31, 1997
------------ -------------
Net asset value, beginning of period $12.80 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .52 .30
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (2.33) 2.88
Net increase (decrease) in net asset
value from operations (1.81) 3.18
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.51) (.30)
Distributions from net realized gains
on investments (.01) -0-
Tax return of capital -0- (.08)
Total dividends and distributions (.52) (.38)
Net asset value, end of period $10.47 $12.80
TOTAL RETURN
Total investment return based on net
asset value (c) (14.90)% 32.24%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $51,214 $37,638
Ratio to average net assets of:
Expenses net of waivers/reimbursements 1.55% 1.77%(d)(e)
Expenses before waivers/reimbursements 1.55% 1.79%(e)
Net investment income 3.87% 2.73%(e)
Portfolio turnover rate 23% 20%
See footnote summary on page 18.
15
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
CLASS B
----------------------------
YEAR ENDED OCT. 1, 1996(A)
AUG. 31, TO
1998 AUG. 31, 1997
------------ -------------
Net asset value, beginning of period $12.79 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .42 .23
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (2.33) 2.89
Net increase (decrease) in net asset
value from operations (1.91) 3.12
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.43) (.24)
Distributions from net realized gains
on investments (.01) -0-
Tax return of capital -0- (.09)
Total dividends and distributions (.44) (.33)
Net asset value, end of period $10.44 $12.79
TOTAL RETURN
Total investment return based on net
asset value (c) (15.56)% 31.49%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $268,856 $186,802
Ratio to average net assets of:
Expenses net of waivers/reimbursements 2.26% 2.44%(d)(e)
Expenses before waivers/reimbursements 2.26% 2.45%(e)
Net investment income 3.16% 2.08%(e)
Portfolio turnover rate 23% 20%
See footnote summary on page 18.
16
ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
CLASS C
----------------------------
YEAR ENDED OCT. 1, 1996(A)
AUG. 31, TO
1998 AUG. 31, 1997
------------ -------------
Net asset value, beginning of period $12.79 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .42 .23
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (2.33) 2.89
Net increase (decrease)in net asset
value from operations (1.91) 3.12
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.43) (.25)
Distributions from net realized gains
on investments (.01) -0-
Tax return of capital -0- (.08)
Total dividends and distributions (.44) (.33)
Net asset value, end of period $10.44 $12.79
TOTAL RETURN
Total investment return based on net
asset value (c) (15.56)% 31.49%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $69,575 $42,719
Ratio to average net assets of:
Expenses net of waivers/reimbursements 2.26% 2.43%(d)(e)
Expenses before waivers/reimbursements 2.26% 2.45%(e)
Net investment income 3.15% 2.06%(e)
Portfolio turnover rate 23% 20%
See footnote summary on page 18.
17
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
ADVISOR CLASS
----------------------------
YEAR ENDED OCT. 1, 1996(A)
AUG. 31, TO
1998 AUG. 31, 1997
------------ -------------
Net asset value, beginning of period $12.82 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income (b) .55 .35
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (2.34) 2.88
Net increase (decrease) in net asset
value from operations (1.79) 3.23
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.54) (.38)
Distributions from net realized gains
on investments (.01) -0-
Tax return of capital -0- (.03)
Total dividends and distributions (.55) (.41)
Net asset value, end of period $10.48 $12.82
TOTAL RETURN
Total investment return based on net
asset value (c) (14.74)% 32.72%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $2,899 $2,313
Ratio to average net assets of:
Expenses net of waivers/reimbursements 1.25% 1.45%(d)(e)
Expenses before waivers/reimbursements 1.25% 1.47%(e)
Net investment income 4.08% 3.07%(e)
Portfolio turnover rate 23% 20%
(a) Commencement of operations.
(b) Based on average shares outstanding.
(c) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. Initial sales charge or contingent
deferred sales charge is not reflected in the calculation of total investment
return. Total investment return calculated for a period of less than one year
is not annualized.
(d) Ratio reflects expenses grossed up for expense offset arrangement with the
Transfer Agent. For the year ended August 31, 1997, the ratios of expenses net
of waivers/reimbursements were 1.77%, 2.43%, 2.42% and 1.44% for Class A, B, C
and Advisor Class shares, respectively.
(e) Annualized.
18
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS
ALLIANCE REAL ESTATE INVESTMENT FUND, INC.
We have audited the accompanying statement of assets and liabilities of
Alliance Real Estate Investment Fund, Inc. (the "Fund"), including the
portfolio of investments, as of August 31, 1998, and the related statement of
operations for the year then ended, and the statement of changes in net assets
and financial highlights for the year then ended and for the period from
October 1, 1996 (commencement of operations) to August 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assur-ance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. 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
Alliance Real Estate Investment Fund, Inc. at August 31, 1998, the results of
its operations for the year then ended, and the changes in its net assets and
the financial highlights for the year then ended and for the period from
October 1, 1996 to August 31, 1997, in conformity with generally accepted
accounting principles.
New York, New York
October 5, 1998
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
_______________________________________________________________________________
In order to meet certain requirements of the Internal Revenue Code we are
advising you that the $288,261 of the capital gain distributions paid by the
Fund during the fiscal year August 31, 1998 is subject to a maximum tax rate of
28%.
Shareholders should not use the above information to prepare their tax returns.
The information necessary to complete your income tax returns will be included
with your Form 1099 DIV which will be sent to you separately in January 1999.
19
ALLIANCE REAL ESTATE INVESTMENT FUND
_______________________________________________________________________________
BOARD OF DIRECTORS
JOHN D. CARIFA, CHAIRMAN
RUTH BLOCK (1)
DAVID H. DIEVLER (1)
JOHN H. DOBKIN (1)
WILLIAM H. FOULK, JR. (1)
HOWARD E. HASSLER (1)
JAMES M. HESTER (1)
CLIFFORD L. MICHEL (1)
DONALD J. ROBINSON (1)
OFFICERS
KATHLEEN A. CORBET, SENIOR VICE PRESIDENT
DANIEL G. PINE, SENIOR VICE PRESIDENT
THOMAS BARDONG, VICE PRESIDENT
DAVID A. KRUTH, VICE PRESIDENT
DANIEL V. PANKER, VICE PRESIDENT
EDMUND P. BERGAN JR., SECRETARY
MARK D. GERSTEN, TREASURER & CHIEF FINANCIAL OFFICER
VINCENT S. NOTO, CONTROLLER
CUSTODIAN
THE BANK OF NEW YORK
48 Wall Street
New York, NY 10286
PRINCIPAL UNDERWRITER
ALLIANCE FUND DISTRIBUTORS, INC.
1345 Avenue of the Americas
New York, NY 10105
LEGAL COUNSEL
SEWARD & KISSEL
One Battery Park Plaza
New York, NY 10004
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
787 Seventh Avenue
New York, NY 10019
TRANSFER AGENT
ALLIANCE FUND SERVICES, INC.
P.O. Box 1520
Secaucus, NJ 07096-1520
Toll-free 1-(800) 221-5672
(1) Member of the Audit Committee.
20
THE ALLIANCE FAMILY OF MUTUAL FUNDS
_______________________________________________________________________________
FIXED INCOME
Alliance Bond Fund
U.S. Government Portfolio
Corporate Bond Portfolio
Alliance Global Dollar Government Fund
Alliance Global Strategic Income Trust
Alliance High Yield Fund
Alliance Mortgage Securities Income Fund
Alliance Limited Maturity Government Fund
Alliance Multi-Market Strategy Trust
Alliance North American Government Income Trust
Alliance Short-Term Multi-Market Trust
Alliance Short-Term U.S. Government Fund
Alliance World Income Trust
TAX-FREE INCOME
Alliance Municipal Income Fund
California Portfolio
Insured California Portfolio
Insured National Portfolio
National Portfolio
New York Portfolio
Alliance Municipal Income Fund II
Arizona Portfolio
Florida Portfolio
Massachusetts Portfolio
Michigan Portfolio
Minnesota Portfolio
New Jersey Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Virginia Portfolio
MONEY MARKET
AFD Exchange Reserves
GROWTH
The Alliance Fund
Alliance Global Environment Fund
Alliance Growth Fund
Alliance Premier Growth Fund
Alliance/Regent Sector Opportunity Fund
GROWTH & INCOME
Alliance Balanced Shares
Alliance Conservative Investors Fund
Alliance Growth & Income Fund
Alliance Growth Investors Fund
Alliance Income Builder Fund
Alliance Real Estate Investment Fund
Alliance Strategic Balanced Fund
Alliance Utility Income Fund
AGGRESSIVE GROWTH
Alliance Global Small Cap Fund
Alliance Quasar Fund
Alliance Technology Fund
INTERNATIONAL
Alliance All-Asia Investment Fund
Alliance Greater China '97 Fund
Alliance International Fund
Alliance International Premier Growth Fund
Alliance New Europe Fund
Alliance Worldwide Privatization Fund
CLOSED-END FUNDS
Alliance All-Market Advantage Fund
ACM Government Income Fund
ACM Government Opportunity Fund
ACM Government Securities Fund
ACM Government Spectrum Fund
ACM Managed Dollar Income Fund
ACM Managed Income Fund
ACM Municipal Securities Income Fund
Alliance World Dollar Government Fund
Alliance World Dollar Government Fund II
The Austria Fund
The Korean Investment Fund
The Spain Fund
The Southern Africa Fund
CASH MANAGEMENT SERVICES
ACM Institutional Reserves
Government Portfolio
Prime Portfolio
Tax-Free Portfolio
Trust Portfolio
Alliance Capital Reserves
Alliance Government Reserves
Alliance Insured Account
Alliance Money Reserves
Alliance Municipal Trust
California Portfolio
Connecticut Portfolio
Florida Portfolio
General Portfolio
Massachusetts Portfolio
New Jersey Portfolio
New York Portfolio
Virginia Portfolio
Alliance Treasury Reserves
Alliance Money Market Fund
Prime Portfolio
Government Portfolio
General Municipal Portfolio
21
ALLIANCE REAL ESTATE INVESTMENT FUND
1345 Avenue of the Americas
New York, NY 10105
(800) 221-5672
ALLIANCE CAPITAL
THIS REPORT IS INTENDED SOLELY FOR DISTRIBUTION TO CURRENT SHAREHOLDERS
OF THE FUND.
R THESE REGISTERED SERVICE MARKS USED UNDER LICENSE FROM THE OWNER,
ALLIANCE CAPITAL MANAGEMENT L.P.
REIAR
