Now, in what some experts say is the most shameful heritage failure in years, a former horse coach salesroom built in 1862 will fall under the wrecker's ball – replaced by a small shopping plaza leading to a laneway.

Once the ornate Italianite-style shopfront is torn down, and the Edwardian building next to it goes too, hundreds of tiny 17-square-metre student apartments will replace it, in a tower approved by Melbourne City Council last week.

"They are replacing it with a half-arsed laneway and entry. It could easily be kept," said Tristan Davies, president of Melbourne Heritage Action.

The group is despairing over the failure to protect the building, built as a coach factory in 1862 and added to in 1887.

A 2011 council heritage report records it as worth keeping because it is "one of the few structures in the central city associated with the once widespread coach building and servicing industry".

Some councillors agree. "It should be saved," said Greens councillor Rohan Leppert, who last month succeeded in getting the council started on a fresh heritage study of the city centre.

But its findings will come too late to save the La Trobe Street building, known as Burton's Livery after the former coach-maker that built it. It has no heritage protection.

The building and its neighbour were bought for $22 million last year by Brisbane-based Blue Sky Alternative Investments, which on Sunday could not be contacted for comment.

Blue Sky plans to build the 43-level student accommodation tower, designed by architects Hayball. Its construction cost is listed as $75 million in its application, lodged with the city council last month.

Melbourne Heritage Action has labelled the refusal of Lord Mayor Robert Doyle to step in as "abysmal", and has collected more than 600 signatures calling on the council to protect the building.

The council's planning chair Ken Ong did not return a call on Sunday about the demolition, while its finance chair Stephen Mayne declined to comment when contacted.

Rohan Storey, a heritage expert and also vice-president of Melbourne Heritage Action, said it was terrible the building would go.

"It's possibly the only building left once associated with the once ubiquitous coach manufacturing and sales in the central city," he said. "It's the 19th-century equivalent of a car repairs and sales outlet."

He said its replacement with "yet another tall, thin apartment tower like many others" would be sad – especially when it was to be replaced by a passageway. "Is that a good enough reason to demolish a heritage building?"