Half of London residing in reserved settlement (6)
I believe the answer is:
colony
'settlement' is the definition.
(I know that settlement can be written as colony)
'half of london residing in reserved' is the wordplay.
'half of' means to take half the letters.
'residing in' indicates putting letters inside.
'reserved' becomes 'coy' (both can mean shy).
'london' halved is 'lon'.
'lon' inserted inside 'coy' is 'COLONY'.
(Other definitions for colony that I've seen before include "sort of territory" , "Dependency" , "Hive" , "Community" , "Settler's territory" .)