It may seem counter-intuitive that London’s real estate market would be so hot when everything else in Europe seems to entering a new Ice Age, but it’s happening all the same, writes Nicholas Vardy of The Global Guru.

With the recent sell-off in global stock markets, it’s now official: there isn’t a single stock market in the world that is up this year.

The S&P 500 is now down about 5% for the year—making it one of the top-performing markets of the world. Hope for a positive year in US markets rests on the possibility of a short and sharp rally between Thanksgiving and the New Year.

But don’t fret for the billionaires of the world. After all, there is one asset class that has outperformed all others this year. And that is prime housing in London. With limited supply and strong demand from Asian and Middle Eastern buyers, this asset class has risen 11.4% in the 12 months to October, even as financial markets have struggled.

Masters of the Universe No More
If you’ve been invested solely in financial markets, it’s been a tough year.

Emerging markets are down 16.6%. The Eurozone stock markets are down 18.1%, with some peripheral countries like Greece down by 50%. Despite their high profile, the BRICs (Brazil, Russia, China, and India) have also crumbled, with India faring the worst, down 27%.

The only place you have made money this year was bonds. And emerging-market bonds were the best of the lot, up a mere 8.6%.

The dirty little secret is that even the "best and the brightest" of the financial world aren’t making money this year. As of a week ago, the HFRX hedge-fund index was down 7.7% for the year. Other "one-hit wonders" like John Paulson have cut some of their investors’ portfolios in half.

Effects of this performance are starting to show in the real world. Several of the most established watering holes that serviced hedge-fund types in London’s Mayfair neighborhood have shut down over the past two years. None have come to take their place.

Two days ago, I walked past a building that serves as the epicenter of Europe’s hedge-fund world. When I looked in the window, I saw an empty trading floor, with rows of abandoned trading stations. Another anonymous hedge fund had rolled down the shutters—or had been chased to Switzerland by the United Kingdom’s onerous taxes.

In fact, much of the money that you see around London today has not been generated through some remarkable feat of whiz-bang financial engineering. Instead, those with cash have made it the old-fashioned way: they pumped it out of the ground in the form of oil or natural gas from a Middle Eastern country. Or they picked the pocket of the Russian or Ukrainian government by buying assets at fire sale prices.

A good chunk of this newfound non-financial wealth is making its way into West London property. Foreign buyers have invested over £6 billion ($9.4 billion) into a tiny section of London during the past 18 months. Money that once found a home on global stock markets and corporate bond markets is now finding its way into London’s housing stock.

Others say the popularity of real estate is more about the anonymity. Swiss banks are more reluctant to take the cash of suspicious-looking foreigners showing up with bags of cash. Property sellers aren’t, effectively making West London property the "new Swiss bank account." No wonder the number of billionaires with properties in London now exceeds 100.

But like any other asset—whether dot-com stocks or Las Vegas real estate—too much interest leads to bubble-style prices. The average price of prime London property has soared 39% since March 2009, compared with 9% for the UK property market.

It is remarkable how many high-profile real estate projects are in the pipeline, all aspiring to sell at about £6,000 ($9,400) per square foot. The Financial Times reports that there are 19 different residential schemes due to be delivered across Mayfair, Chelsea, Kensington, and Knightsbridge during the next four years.

Then there is a disconnect between the reality on the streets and the aspirations of promoters. This past week, the Sunday Times reported that 40% of the apartments at One Hyde Park, the world’s most expensive address, have yet to be sold, after four years on the market.

And once 19 more developments come on line, you have to wonder whether there will be enough well-heeled buyers to fork out the dough. My prediction is that London property will be tipped from its current high perch within the next three years.

In the end, bubbles always pop. Not even the billionaires can ignore the law of supply and demand.

Subscribe to The Global Guru here…

Related Readings: