The purchase comes as the council faces complex repairs to deteriorating pipes along Bath St.
Councillors made the decision to buy property — for the purpose of connecting pipes between Bath St and Moray Pl — in an August meeting, which was closed to the public due to commercial sensitivity.
Before the purchase, it had been in negotiations with the owners of nearby buildings about doing the work under their properties.
The budget would be sourced from $526 million set aside for three waters capital projects over the next 10 years, but the total cost would be known after project design was confirmed, a spokeswoman said.
She said the area was at risk of flooding and sinkholes if nothing was done to remedy the situation.
Council infrastructure and development general manager Simon Drew said work to repair the damaged watercourse would be difficult.
"Realigning the partially collapsed watercourse is particularly challenging from an engineering perspective," he said.
This was because the pipe was partially collapsed and blocked, and ran under private property along Bath St between Stuart St and Moray Pl.
There were also partially collapsed drains in the area.
The council had surveyed re-routing the watercourse along lower Stuart St, but the Bath St to Moray Pl method was considered the best option.
Mr Drew said the purchase meant they were a step closer to an efficient solution to upgrade the old and failing pipes.
The area had not yet had flooding issues because of a pump installed as a temporary solution.
This was not a permanent solution and was only expected to remain in place until pipe renewal was completed.
The building at 326 Moray Pl had recently come on to the market and the council bought the property for $1.7 million as a potential space for the pipe alignment.
However, it had not yet been determined whether the site was suitable for the work.
Although the property was the preferred site, further investigations would be carried out in November to confirm this, Mr Drew said.
Dunedin landlord Ronald Wade, who owns the building next to the now council property, said he had previously been in discussions with the council over a number of years about a solution that would involve his property.
He was only recently informed about the purchase.
Side-on Cafe and Stand Children's Services Tu Maia Whanau — located in the building bought — declined to comment on the sale.
Council confirmed businesses would not need to close during investigations, but they would start discussions if the site was suitable.
Work was expected to begin early next year and would take over a year to complete.
All three water mains on Bath St would be included in the replacement.
