1) It's an major English speaking city with a culture many of the YC partners are comfortable with. Running an event in a country with a foreign language and culture is hard.
2) It's well connected with flights from pretty much every major city in Europe and has direct flights from SF & NY. Not only for attendees but also for convincing speakers to attend.
3) It's by far the biggest startup/tech hub in Europe (excluding Israel) and YC is very pro-hub (one of the reasons YC moved from Boston to SF).
Obviously there's downsides to London, mainly being that it's an expensive city but given that it's a one-day event that gets mitigated to some extent.