It was just like the good old days in the hotel sector at the beginning of last week, with all sorts of rumours of big-ticket deals doing the rounds. Von Essen Hotels was mulling over a bid of £250 million for the Hotel du Vin chain, I was assured by a source, while another insisted that the recently refurbished Grosvenor House in London was set to be snapped up by a Middle Eastern investor for more than £600 million. Given the dearth of M&A activity since the arrival of the credit crunch last summer, neither story seemed particularly credible.

Then again, last week also saw the sale of the Hôtel Prince de Galles in Paris for €141 million (£110 million) to a wealthy Middle Eastern family, who reputedly plan to invest a further €80 million converting it to Starwood's stylish W Hotels concept.Yet by the end of the week it was back to the real world as HBOS called in administrators at GuestInvest, the buy-to-let hotel operator, and pulled the plug on a £200 million debt and equity facility with aAIM, a property investment group with a big focus on hotel and leisure assets.

HBOS's actions, not to mention its impending takeover by the much more conservative Lloyds TSB, are causing considerable nervousness in the hotel sector. The bank has pumped billions into the industry in recent years, backing operators including Macdonald Hotels, the Rocco Forte Collection, City Inn and the Alternative Hotel Group, which owns the De Vere and Village brands. To date, most operators have managed to steer a relatively untroubled course through the turmoil of the past year or so, enjoying resilient trading and managing to offset big cost increases by nudging up the room rate - but with occupancy beginning to tail off, rates inevitably will come under pressure. On Thursday, Marylebone Warwick Balfour admitted that its boutique Hotel du Vin and Malmaison chains had been affected by tightening corporate budgets, with guests were also spending less on food and drink.

The robust trading enjoyed by the sector is one of the reasons for the almost complete absence of M&A activity. While the disappearance of debt funding has clearly been the main factor, those buyers who are still looking for deals complain that, because trading has yet to fall off a cliff, owners have retained unrealistic opinions on the value of their assets.

They may not have to long wait, however. While trading in London is still holding up, the provinces are starting to suffer and operators with little or no presence in the capital are looking worried. Analysts are predicting a tough fourth quarter as the recent financial meltdown filters through to corporate and leisure spending, while next year is looking bleak. How operators fare when the going gets tough will depend not only on the robustness of their trading but also on their financial strength. Some of the highly geared operators bought at the top of the market on racy earnings multiples will start to creak, causing banks to review loan-to-value balances. Some chains that have changed hands in recent years comprised hotels of rather mixed quality and those that have failed to weed out poorer properties will be at greatest risk.

Although hotel deals have dried up since the credit crunch, there is no shortage of equity investors looking for bargains — and a sharp fall in values, not to mention a few more casualties, may soon set the vultures circling.

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