<PAGE>
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DIRECTORS OFFICERS
Barton M. Biggs Stefanie V. Chang
CHAIRMAN OF THE BOARD VICE PRESIDENT
Chairman and Director, Morgan Stanley Asset Management Harold J. Schaaff, Jr.
Inc. and Morgan Stanley VICE PRESIDENT
Asset Management Limited; Managing Joseph P. Stadler
Director, Morgan Stanley & Co. Incorporated VICE PRESIDENT
Michael F. Klein Valerie Y. Lewis
DIRECTOR AND PRESIDENT SECRETARY
Principal, Morgan Stanley Asset Management Inc. and Karl O. Hartmann
Morgan Stanley & Co. Incorporated ASSISTANT SECRETARY
John D. Barrett II Joanna M. Haigney
Chairman and Director, TREASURER
Barrett Associates, Inc. Rene J. Feuerman
Gerard E. Jones ASSISTANT TREASURER
Partner, Richards & O'Neil LLP
Andrew McNally IV
River Road Partners
Samuel T. Reeves
Chairman of the Board and Chief Executive Officer,
Pinacle L.L.C.
Fergus Reid
Chairman and Chief Executive Officer, LumeLite
Plastics Corporation
Frederick O. Robertshaw
Of Counsel, Copple, Chamberlin &
Boehm, P.C.
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INVESTMENT ADVISER AND ADMINISTRATOR
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
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DISTRIBUTOR
Morgan Stanley & Co. Incorporated
1221 Avenue of the Americas
New York, New York 10020
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CUSTODIANS
The Chase Manhattan Bank
3 Chase MetroTech Center
Brooklyn, New York 11245
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11210
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LEGAL COUNSEL
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
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INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036
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For current performance, current net asset value, or for assistance with your
account, please contact the Fund at (800) 548-7786. This report is authorized
for distribution only when preceded or accompanied by prospectuses of the Morgan
Stanley Institutional Fund, Inc.
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
P.O. Box 2798
Boston, MA 02208-2798
[LOGO] MORGAN STANLEY
INSTITUTIONAL FUND, INC.
EUROPEAN REAL ESTATE PORTFOLIO
FIRST QUARTER REPORT
MARCH 31, 1998
<PAGE>
LETTER TO SHAREHOLDERS
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The investment objective of the European Real Estate
Portfolio is to provide current income and long-term capital appreciation by
investing primarily in equity securities of companies in the European real
estate industry.
For the three months ended March 31, 1998, the Portfolio had a total return of
16.28% for the Class A shares and 16.18% for the Class B shares compared to
13.27% for the GPR Life European Real Estate T.R. Index (the "Index"). For the
period from October 1, 1997 (commencement of operations) through March 31, 1998,
the Portfolio had a total return of 10.79% for Class A shares and 10.65% for
Class B shares compared to 13.30% for the Index.
The first quarter of 1998 saw the European property markets turn their focus
from international macroeconomic meltdowns, toward a local concentration on
domestic real estate recoveries. This refocus on fundamentals resulted in
exceptional returns. A prime
PERFORMANCE COMPARED TO THE GPR LIFE
EUROPEAN REAL ESTATE T.R. INDEX(1)
- -----------------------------------
<TABLE>
<CAPTION>
TOTAL RETURNS(2)
---------------------------
YTD SINCE INCEPTION
---------- ---------------
<S> <C> <C>
PORTFOLIO -- CLASS A(3).......... 16.28% 10.79%
PORTFOLIO -- CLASS B(3).......... 16.18 10.65
INDEX............................ 13.27 13.30
</TABLE>
1. The GPR Life European Real Estate T.R. Index is a European market
capitalization weighted index of listed property/real estate securities
measuring total return.
2. Total returns for the Portfolio reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waiver and reimbursement, total
returns would be lower.
3. The Portfolio commenced operations on October 1, 1997.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE.
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THE COUNTRY SPECIFIC PERFORMANCE RESULTS PROVIDED IN THIS OVERVIEW ARE FOR
INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A GUARANTEE OF THE
PORTFOLIO'S FUTURE PERFORMANCE. PAST PERFORMANCE SHOWN IS NOT PREDICTIVE OF
FUTURE PERFORMANCE. 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. PLEASE SEE THE PROSPECTUS FOR A DESCRIPTION OF CERTAIN RISK
CONSIDERATIONS ASSOCIATED WITH INTERNATIONAL INVESTING.
example is France. The attention directed at the real estate recovery propelled
French property stocks by 17.7% in U.S. dollar terms. Foreign investment flooded
the market, driving property yields into the 6.0% range. Further south, the
smaller markets of Italy, Spain, and Portugal also demonstrated exceptional
returns of 70.5%, 34.6% and 30.0%, respectively, in U.S. dollars, based on local
fundamentals driven by expected yield shifts. At the same time, continued growth
in Irish and United Kingdom rental rates brought above average returns,
irrespective of the country's position toward the European Monetary Unit (EMU).
In Scandinavia, the markets as a whole underperformed, but select locations and
property types performed well.
During the period, we added to our French investment, in particular increasing
our commercial positions, while reducing our residential exposure. We believe
the residential recovery is 12-18 months behind the commercial sector. We also
continued to build our exposure to Spain and Italy, bringing both to overweight
levels. These increases were offset by a further underweight in the UK.
Believing the best of the market has past, our current position focuses on the
smaller undervalued names in retail and warehousing rather than the popular UK
majors. Our bullish stance on Sweden is beginning to pay-off as the recent
merger activity is expected to continue through 1999. Finally, we remain
slightly underweight in the Netherlands. The underlying fundamentals continue to
perform well, but current market valuations fail to justify a stronger
investment in the Dutch market at this time.
Jan Willem de Geus
PORTFOLIO MANAGER
April 1998
2
<PAGE>
INVESTMENTS (UNAUDITED)
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MARCH 31, 1998
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
COMMON STOCKS (96.5%)
BELGIUM (1.2%)
14,000 Retail Estates $ 378
---------
DENMARK (2.7%)
16,700 EjendomsSelskabet Norden A/S 836
---------
FRANCE (21.0%)
1,700 Bail Investissement 246
7,825 Klepierre 1,257
3,274 Locindus 446
6,000 Sefimeg 399
7,900 Silic 1,256
5,000 Societe Fonciere Lyonnaise 752
10,700 Sophia 441
3,250 Unibail 407
9,957 Union Immobiliere de France SA 715
19,824 Union Pour le Financement
d'Immeubles de Societes 701
---------
6,620
---------
ITALY (2.7%)
553,200 Inmobiliare Metanopoli S.p.A. 857
---------
NETHERLANDS (7.5%)
60,000 Rodamco N.V. 1,641
46,750 UNI-INVEST N.V. 713
---------
2,354
---------
NORWAY (7.7%)
140,200 Avantor ASA 1,232
9,700 Linstow ASA 1,049
9,752 Steen & Strom ASA 158
---------
2,439
---------
SPAIN (2.0%)
10,300 Inmobiliaria Metropolitana Vasco
Central S.A. 620
---------
SWEDEN (15.0%)
85,700 Castellum AB 895
85,300 Fastighets AB Tornet 1,259
172,100 Piren AB 1,292
488,900 Platzer Bygg AB, Class B 856
89,300 Storheden AB 406
---------
4,708
---------
UNITED KINGDOM (36.7%)
241,400 Allied London Properties plc 453
453,100 Buford Holdings plc 989
96,600 Capital Shopping Centers plc 743
213,600 Freeport Leisure plc 1,368
130,300 Frogmore Estates plc 1,157
<CAPTION>
VALUE
SHARES (000)
- --------------- ---------
<C> <S> <C>
466,200 Grantchester Holdings plc $ 1,445
223,500 Great Portland Estates plc 1,034
32,200 Hammerson plc 284
249,900 Jarvis Hotels plc 704
182,900 MEPC plc 1,822
438,700 Town Centre Securities plc 820
440,000 Wates City of London Properties
plc 719
---------
11,538
---------
TOTAL FOREIGN SECURITIES (Cost $28,177) 30,350
---------
<CAPTION>
FACE
AMOUNT
(000)
- ---------------
<C> <S> <C>
SHORT-TERM INVESTMENTS (5.6%)
REPURCHASE AGREEMENT (5.6%)
$ 1,774 Chase Securities, Inc. 5.60%,
dated 3/31/98, due 4/01/98, to be
repurchased at $1,774,
collateralized by U.S. Treasury
Bills, due 6/11/98, valued at
$1,835 (Cost $1,774) 1,774
---------
FOREIGN CURRENCY (2.2%)
BEF 2,895 Belgian Franc 76
ESP 10 Spanish Peseta --
GBP 358 British Pound 600
---------
TOTAL FOREIGN CURRENCY (Cost $678) 676
---------
TOTAL INVESTMENTS (104.3%) (Cost $30,629) 32,800
---------
OTHER ASSETS AND LIABILITIES (-4.3%)
Other Assets 4,555
Liabilities (5,918)
---------
(1,363)
---------
NET ASSETS (100%) $ 31,437
---------
---------
CLASS A:
NET ASSETS $ 30,076
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 2,717,651 outstanding $0.001 par
value shares (authorized 500,000,000 shares)
$11.07
---------
---------
CLASS B:
NET ASSETS $1,361
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE
Applicable to 123,020 outstanding $0.001 par
value shares (authorized 500,000,000 shares)
$11.06
---------
---------
</TABLE>
3
