Using methods that have been touted as a potential solution to the UK’s housing crisis, L&G will build the homes almost entirely off-site in a new factory in Yorkshire, which will be Europe’s largest.

The venture would boost new home building rates in the UK, which faces a severe shortage of workers with traditional construction skills. Government ministers are keen to bring about a steep increase in construction.

Housebuilders have been increasing their output, but experts including the House of Lords’ committee on the built environment have warned they lack the capacity to produce 200,000 homes a year in England — the government’s target.

L&G already owns a 46.5 per cent stake in the upmarket housebuilder Cala Homes, but the new venture will be carried out by the wholly owned entity L&G Homes.

Tom Ground, head of bulk annuities at L&G, is to head the new venture. L&G declined to comment.

The move will be partly aimed at constructing homes for rent, after L&G announced it would launch a £600m “build-to-rent” fund to develop purpose-built tenanted blocks using cash from its own balance sheet, matched by the Dutch pension fund PGGM.

L&G has signed a 10-year lease on a 555,000 square foot warehouse in Sherburn in Elmet, Yorkshire, as its initial factory and plans to invest up to £500m in replicating the model at other locations, according to people close to the situation.

The company has invested billions in regeneration and infrastructure, both on behalf of its insurance clients and in joint projects with other institutional investors.

Housebuilders including Persimmon use off-site construction for parts of some properties, but modular output — prefabricated houses that are partly built elsewhere and assembled on-site — has so far been limited in the UK compared with markets such as the US.

“People have been looking at these methods of construction for a long time but the take-up has been relatively poor to date. You don’t have anyone delivering significant volume into that market,” said Lucian Cook, head of residential research at the estate agency Savills.

“Traditional housebuilders are more comfortable with traditional housebuilding models. They haven’t necessarily had the levels of commitment and investment to achieve the economies of scale that this needs.”

He said L&G’s venture could act as a “catalyst” for other companies taking off-site production methods more seriously.

Build-cost inflation using traditional methods such as bricklaying has been running at more than 6 per cent a year over the past two years, largely because of a lack of skilled workers.

Another company aiming to produce large numbers of modular homes is the architecture practice Rogers Stirk Harbour & Partners, which has developed its Y-Cube one-bed low-energy affordable housing units in tandem with YMCA London South West.

It has worked on relatively small sites but has said it wants to increase output to 7,500 units a year.