Southwark Council has agreed to build a new church and community centre on the site of the Castle Resource Centre in Hampton Street to replace Crossway United Reformed Church on New Kent Road.
The United Reformed Church owns the freehold of the site on New Kent Road which forms part of the Heygate Estate.
Earlier this month the council's planning committee approved an outline masterplan for the redevelopment of the estate, including the plot occupied by the church.
A public inquiry into the compulsory purchase order proceedings launched by the council for Crossway United Reformed Church and the remaining leaseholder residents on the estate is due to begin next week.
Rather than paying out compensation to the church, the borough's cabinet this week agreed to provide the URC with a new church building that the council will construct 350 metres away on the site of the Castle Resource Centre in Hampton Street, at the foot of the Strata SE1 tower.
"Crossway is a freeholder on the Heygate Estate, and in order to progress the regeneration we needed to buy them out or relocate them," said Cllr Fiona Colley, the council's cabinet member for regeneration.
"I'm particularly pleased that we are relocating them rather than buying them out. Crossway church has been in the area for a great many years. The church that stands there today is a replacement of a church which was knocked down when the estate was built."
She added: "They really are at the heart of the community and ... I know they are very pleased that we will be able to provide them with a modern church ... on a prominent site in Elephant & Castle.
Cllr Claire Hickson, cabinet member for communities, added: "I've been to some of the consultation meetings at Elephant & Castle and I've seen how strongly people feel about this church. It's really good that we've been able to do this."
As well as the URC congregation, the current building hosts eight other churches who do not have premises of their own. Its facilities are also used for a food bank, work with asylum seekers, youth groups and a range of community activities.
The new three-storey building will include four new council homes as well as two flats for the use of the church to replace the current manse on the Heygate Estate.
Director of regeneration Steve Platts told the cabinet that the council has carried out initial consultation on the plans for the new church with residents of Strata SE1 and Draper House.
However, demolition of the current Castle Resource Centre will involve the loss of 25 lock-up garages which are currently fully let and for which there is a waiting list.
The Castle Resource Centre – formerly a day centre for people with mental health problems – was the subject of heated political exchanges last spring when the charity which ran it – Together – announced it was leaving the building.
The services previously based at Castle were relaunched last autumn as Southwark Your Way from a new base on the Aylesbury Estate.
Ant Oxley from Together said: "The transformation of Castle Day Centre to Southwark Your Way has had a positive impact on both staff and service users.
"With the greater flexibility of staff and the increased level of support we have seen clients start to achieve their goals and not only stay well but begin to fulfil their potential in life."