UPDATE 1-Loblaw to create one of Canada's largest REITs

TORONTO, Dec 6 (Reuters) - Loblaw Companies Ltd, Canada's largest grocer, said on Thursday it plans to create a real estate investment trust to hold a significant part of its real estate assets, in an effort to create value for shareholders.

The company said it plans to sell units of the REIT through an initial public offering, and estimates Loblaw will initially contribute real estate worth more than C$7 billion ($7.05 billion) into the REIT.

Canadian REITs have outperformed the broader market, as demand for commercial and retail real estate holds strong. Economic growth has boosted demand for office space, even as U.S. retailers keen to expand in Canada vie for prime retail space in the country.

The S&P TSX Canadian REIT Index has risen more than 9 percent in the last 12 months, while Canada's benchmark S&P TSX Composite Index has risen just 1.7 percent.

The Loblaw announcement comes just a day after a consortium led by Canada's KingSett Capital offered about C$2.6 billion to acquire Primaris Retail REIT to bolster its portfolio of Canadian shopping malls.

Loblaw, majority owned by George Weston Ltd, said its parent intends to retain a significant majority interest in the REIT.

"The creation of the REIT is expected to build long-term value both for Loblaw and the REIT," said Galen Weston, Loblaw's executive chairman, in a statement.

He said the spin-off will allow Loblaw's to pay down debt, buy back shares, and create a long-term source of capital to invest and grow its grocery business.

Loblaw and other Canadian grocers have been under pressure as Wal-Mart Stores, the world's largest retailer, expands its grocery business in Canada. No. 2 U.S. discount retailer Target Corp opens its first Canadian stores next spring, in another potential threat.

Loblaw said the REIT will be a vehicle to manage and enhance its real estate portfolio. It may expand the venture in future by adding more of its own real estate and investing elsewhere.

Analysts have long speculated that Loblaw and other Canadian retailers like Hudson's Bay Co could move their vast real estate assets into such REIT structures.

The IPO is expected to be completed in mid-2013, subject to market conditions and regulatory approval, Loblaw said.