In an interview, Liz Peace, chief executive of the British Property Federation (BPF), said the end of extended tax relief this year on empty buildings was like kicking commercial landlords when they were down and most vulnerable.

The BPF represents quoted and private property companies, funds, and agents in the UK and has been lobbying hard for the reintroduction of empty rates relief in the wake of a near 20 percent drop in property valuations over the past year.

The timing of the tax change could not be worse, she said.

With the economy deteriorating, Britain's commercial property industry is braced for another leg down in building values as tenant demand for industrial, retail, and office space wilts and vacancy rates rise.

"It is a tax on failure, a tax on a lack of business success, which seems pretty potty ... and not very helpful in a downturn," Peace said. "Taxes on failure are likely to make that failure even deeper."

In April, new laws took effect that left landlords and leaseholders having to pay full business tax rates on shops and offices that were empty for more than three months and on warehouses and other types of industrial property that were empty for more than six months.

The government hopes the new policy will lead to lower rents for smaller businesses or push developers into converting old buildings for alternative use, including housing.

But an economic slowdown and rising vacancy rates will increase the burden of empty property rates, and some developers have called the changes a charter for demolitions.

Industrial property landlords such as SEGRO and Brixton especially face higher tax bills as a result, having previously benefited from 100 percent tax relief.

But office and shop owners will also be stung, having previously attracted 50 percent tax relief, Peace said.

A spokeswoman for British Land currently the biggest office developer in central London, with about 2 million square feet of new space due between now and late 2011, said the reduced tax relief had been factored into the firm's earnings.

The company has assumed it will take an average 32 months to fully let its four main office developments.

Peace said the BPF wanted to assemble a dossier of evidence in the coming months as vacancy rates rose to highlight the adverse effects of the tax changes and to persuade the government to change its mind.

Residential REIT

Battle lines had also been drawn around Britain's 18 month-old real estate investment trust (REIT) regime, which the BPF wanted to expand to help tackle a growing housebuilding crisis, she said.

Despite projected shortfalls in the supply of UK housing, housebuilders have slammed the brakes for new work because of a slump in house sales and mortgage lending. That has left them unable to shift stock and at the mercy of creditors.

Peace said REITs were currently barred from holding residential property but had the potential to take up some of the slack by helping the development of a private rented sector.

"REITs are a possible way of helping the housing sector," she said. "They might be a way of absorbing the surplus stock that householders cannot buy because people cannot access debt."

REITs are property companies that pay no tax on their profit because the lion's share is redistributed to shareholders in the form of dividends. Most of Britain's biggest quoted property companies are REITs.