Let's come up with an amphibian race!

Why does the city have to be on the water? It can be on land, but be a magical lake where these creatures live. Then many problems will be avoided.

I'll explain. It is possible to do it the way you suggest, but that would be the simplest approach, and therefore the least interesting. If we do it the way we are thinking, then another level will appear - the underwater world. If this isn't implemented in Heroes 5, I hope it will definitely be in Heroes 6.