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It would be better to have both mages and elves. Both races are very important for Heroes, and this is one of their defining features. And somehow, people managed without a city for the Dungeon faction until now. It would be great for the expansion pack, and also for the first release. But, I think it would be better without compromising the other factions.
P.S. I would like to note that without mages and elves, two storylines are lost, which those who have played Heroes 5 are waiting for:
1) The appearance of necromancers (because they originated from mages)
2) The appearance of dark elves.