I doubt the city is genjutsu... there's no reason for it since the leader is projecting himself just like the rest of Akatsuki. Besides that, p.15 of Ch. 329 shows clearly the city from the leader's perspective, so I assume it's real.

I think it's on the coast because of the general height of buildings (usually for ports, offloading cargo and stuff like that) and because there seems to be a flock of seagulls in the bottom right of p16-17 of 329.

(P. 15 - city is real)


(P.16-17 - seagulls? in lower right-hand corner)