Property developers could gain hundreds of millions of pounds in windfall profits under a new policy allowing them reduce contributions to building affordable housing or even avoid paying altogether, a council has claimed.

Since December, the government has exempted anyone who turns an empty building into private housing from paying for further affordable units, even if they could do so and still make healthy profits.

Among the first  to have benefited are the redevelopers of a luxury Mayfair apartment block in central London bought in 2013 by Abu Dhabi’s investment fund. Planners fear Qatar’s ruling family could be next to gain if their agents seek a cut in the affordable housing bill on the £3bn redevelopment of Chelsea barracks.

A senior official at Westminster city council described the government’s new vacant building credit as insane and estimated could lose as much as £1bn in housing payments, deepening the accommodation crisis. An executive member for housing at the London borough of Islington, said: “The real impact of this is to increase landowners’ and developers’ profits at the expense of the affordable housing we desperately need.” He said he would resist the policy. The alarm over the rule change was sounded by John Walker, director of planning at Westminster, who described it as “a government gift”.

Last month the property developers of an apartment scheme backed by the Abu Dhabi Investment Council used the system to cut their contribution by £9m, even though Westminster said the developers had already agreed their project would be profitable if they donated £17.9m. The scheme at 20 Grosvenor Square features palatial 5,000 sq ft apartments, with cinemas and billiard rooms, that are five times larger than the average new British home.

The exemption does not require any minimum length of time that a property should be empty, sparking fears it could increase the number of empty buildings as owners flush out tenants before applying for permission to redevelop in order to benefit from the credit.

Westminster is worried other property developers, including Qatari Diar that had agreed to build 123 affordable homes and make a £78m contribution as part of its deal to redevelop Chelsea barracks, could now reapply and seek to reduce its affordable housing obligation.

The Department for Communities and Local Government introduced the exemption in December when it also allowed anyone building fewer than 10 homes to avoid making a contribution to affordable housing. The idea is to increase the supply of housing.

Great Marlborough Estates is planning 80 homes near Regent’s Park and is expected to pay £18.7m in affordable housing contribution. Westminster said the council now expects to lose more than £10m of that.