Recent research into the production of Sphagnum biomass in extracted peatlands, an alternative to ecological restoration as a post‐industrial use of peatlands, has highlighted the need for an improved understanding of the ecohydrology of Sphagnum regenerating in these environments. Previous work suggested that limited connectivity between surficial layers and the underlying partially decomposed plant matter and peat would result in water stress and inhibited growth. This study links the soil water dynamics of regenerated layers ranging in age from 3 to 43 years and from 3 to 40 cm in thickness to the productivity of Sphagnum in order to determine the hydrological controls on productivity and the optimal range of water content for producing Sphagnum biomass. Productivity was never observed to be limited by insufficient supply of water, including during periods where water table was >40 cm below the surface and periods of 16 days without measured precipitation. While layers of different ages and thicknesses were able to sustain adequate water supply to remain productive under a range of conditions, the ability of layers to transmit water upwards differed greatly. Water content in the near‐surface inhibited productivity during wetter periods, especially at newly regenerating sites where the layer was <5 cm thick. This has important implications for biomass production using the Sphagnum species studied here. Using a mixed linear modelling approach to isolate the effects of water content on variance in productivity from those of other measured variables, a volumetric water content of 0.10 is identified as optimal. Copyright © 2015 John Wiley & Sons, Ltd.