diff --git a/tycho-its/projects/target.variables/env/pom.xml b/tycho-its/projects/target.variables/env/pom.xml
index e1c0165ccb..cb5a88de02 100644
--- a/tycho-its/projects/target.variables/env/pom.xml
+++ b/tycho-its/projects/target.variables/env/pom.xml
@@ -54,6 +54,7 @@
     <modules>
         <module>targetplatform</module>
         <module>project</module>
+        <module>site</module>
     </modules>
 
 </project>
diff --git a/tycho-its/projects/target.variables/env/site/category.xml b/tycho-its/projects/target.variables/env/site/category.xml
new file mode 100644
index 0000000000..a38da4c9dc
--- /dev/null
+++ b/tycho-its/projects/target.variables/env/site/category.xml
@@ -0,0 +1,3 @@
+<site>
+
+</site>
\ No newline at end of file
diff --git a/tycho-its/projects/target.variables/env/site/pom.xml b/tycho-its/projects/target.variables/env/site/pom.xml
new file mode 100644
index 0000000000..010c945ebc
--- /dev/null
+++ b/tycho-its/projects/target.variables/env/site/pom.xml
@@ -0,0 +1,26 @@
+<project xmlns="http://maven.apache.org/POM/4.0.0"
+    xmlns:xsi="http://www.w3.org/2001/XMLSchema-instance"
+    xsi:schemaLocation="http://maven.apache.org/POM/4.0.0
+    http://maven.apache.org/maven-v4_0_0.xsd">
+    <modelVersion>4.0.0</modelVersion>
+    <artifactId>site</artifactId>
+    <packaging>eclipse-repository</packaging>
+    <parent>
+        <groupId>tycho-its-project.variables.env</groupId>
+        <artifactId>aggregator</artifactId>
+        <version>1.0.0</version>
+    </parent>
+
+    <build>
+        <plugins>
+            <plugin>
+                <groupId>org.eclipse.tycho</groupId>
+                <artifactId>tycho-p2-repository-plugin</artifactId>
+                <version>${tycho-version}</version>
+                <configuration>
+                    <addIUTargetRepositoryReferences>true</addIUTargetRepositoryReferences>
+                </configuration>
+            </plugin>
+        </plugins>
+    </build>
+</project>
\ No newline at end of file
diff --git a/tycho-its/projects/target.variables/sysprop/pom.xml b/tycho-its/projects/target.variables/sysprop/pom.xml
index d06f2b79d5..b761a34c35 100644
--- a/tycho-its/projects/target.variables/sysprop/pom.xml
+++ b/tycho-its/projects/target.variables/sysprop/pom.xml
@@ -54,6 +54,7 @@
     <modules>
         <module>targetplatform</module>
         <module>project</module>
+        <module>site</module>
     </modules>
 
 </project>
diff --git a/tycho-its/projects/target.variables/sysprop/site/category.xml b/tycho-its/projects/target.variables/sysprop/site/category.xml
new file mode 100644
index 0000000000..a38da4c9dc
--- /dev/null
+++ b/tycho-its/projects/target.variables/sysprop/site/category.xml
@@ -0,0 +1,3 @@
+<site>
+
+</site>
\ No newline at end of file
diff --git a/tycho-its/projects/target.variables/sysprop/site/pom.xml b/tycho-its/projects/target.variables/sysprop/site/pom.xml
new file mode 100644
index 0000000000..c778e1ea93
--- /dev/null
+++ b/tycho-its/projects/target.variables/sysprop/site/pom.xml
@@ -0,0 +1,26 @@
+<project xmlns="http://maven.apache.org/POM/4.0.0"
+    xmlns:xsi="http://www.w3.org/2001/XMLSchema-instance"
+    xsi:schemaLocation="http://maven.apache.org/POM/4.0.0
+    http://maven.apache.org/maven-v4_0_0.xsd">
+    <modelVersion>4.0.0</modelVersion>
+    <artifactId>site</artifactId>
+    <packaging>eclipse-repository</packaging>
+    <parent>
+        <groupId>tycho-its-project.variables.sysprop</groupId>
+        <artifactId>aggregator</artifactId>
+        <version>1.0.0</version>
+    </parent>
+
+    <build>
+        <plugins>
+            <plugin>
+                <groupId>org.eclipse.tycho</groupId>
+                <artifactId>tycho-p2-repository-plugin</artifactId>
+                <version>${tycho-version}</version>
+                <configuration>
+                    <addIUTargetRepositoryReferences>true</addIUTargetRepositoryReferences>
+                </configuration>
+            </plugin>
+        </plugins>
+    </build>
+</project>
\ No newline at end of file
diff --git a/tycho-its/projects/target.variables/sysprop/targetplatform/targetplatform.target b/tycho-its/projects/target.variables/sysprop/targetplatform/targetplatform.target
index c802356861..7a6e58cb09 100644
--- a/tycho-its/projects/target.variables/sysprop/targetplatform/targetplatform.target
+++ b/tycho-its/projects/target.variables/sysprop/targetplatform/targetplatform.target
@@ -4,7 +4,6 @@
     <locations>
         <location includeAllPlatforms="false" includeConfigurePhase="true" includeMode="planner" includeSource="true" type="InstallableUnit">
             <repository location="${system_property:myMirror}/repo"/>
-
             <unit id="javax.xml" version="0.0.0"/>
         </location>
     </locations>
diff --git a/tycho-its/src/test/java/org/eclipse/tycho/test/target/TargetVariableResolutionTest.java b/tycho-its/src/test/java/org/eclipse/tycho/test/target/TargetVariableResolutionTest.java
index 2fa42955c1..47e94d826a 100644
--- a/tycho-its/src/test/java/org/eclipse/tycho/test/target/TargetVariableResolutionTest.java
+++ b/tycho-its/src/test/java/org/eclipse/tycho/test/target/TargetVariableResolutionTest.java
@@ -12,11 +12,21 @@
  *******************************************************************************/
 package org.eclipse.tycho.test.target;
 
+import static org.hamcrest.MatcherAssert.assertThat;
+import static org.hamcrest.Matchers.containsInAnyOrder;
+import static org.junit.Assert.assertEquals;
+
+import java.nio.file.Path;
+import java.nio.file.Paths;
 import java.util.Arrays;
+import java.util.List;
 
 import org.apache.maven.it.Verifier;
+import org.eclipse.equinox.p2.repository.IRepository;
 import org.eclipse.tycho.test.AbstractTychoIntegrationTest;
 import org.eclipse.tycho.test.util.HttpServer;
+import org.eclipse.tycho.test.util.P2RepositoryTool;
+import org.eclipse.tycho.test.util.P2RepositoryTool.RepositoryReference;
 import org.eclipse.tycho.test.util.ResourceUtil;
 import org.junit.After;
 import org.junit.Before;
@@ -48,6 +58,7 @@ public void repositoryUrlCanContainEnvVarVariable() throws Exception {
 		verifier.executeGoals(Arrays.asList("package"));
 		verifier.verifyErrorFreeLog();
 		verifier.verifyTextInLog("validate-target-platform");
+		verifyResolution(verifier);
 	}
 
 	@Test
@@ -57,5 +68,22 @@ public void repositoryUrlCanContainSystemPropertyVariable() throws Exception {
 		verifier.executeGoals(Arrays.asList("package"));
 		verifier.verifyErrorFreeLog();
 		verifier.verifyTextInLog("validate-target-platform");
+		verifyResolution(verifier);
+	}
+
+	/**
+	 * Verify that the update site has the target platform variables resolved
+	 * correctly.
+	 */
+	private void verifyResolution(Verifier verifier) throws Exception {
+		final Path sitePath = Paths.get(verifier.getBasedir(), "site");
+		P2RepositoryTool p2Repo = P2RepositoryTool.forEclipseRepositoryModule(sitePath.toFile());
+		List<RepositoryReference> allRepositoryReferences = p2Repo.getAllRepositoryReferences();
+		// artifact + metadata
+		assertEquals(2, allRepositoryReferences.size());
+		final String REPO = baseurl + "/repo";
+		assertThat(allRepositoryReferences,
+				containsInAnyOrder(new RepositoryReference(REPO, IRepository.TYPE_ARTIFACT, IRepository.ENABLED),
+						new RepositoryReference(REPO, IRepository.TYPE_METADATA, IRepository.ENABLED)));
 	}
 }
diff --git a/tycho-p2-repository-plugin/src/main/java/org/eclipse/tycho/plugins/p2/repository/AssembleRepositoryMojo.java b/tycho-p2-repository-plugin/src/main/java/org/eclipse/tycho/plugins/p2/repository/AssembleRepositoryMojo.java
index 955a5a05ae..a08709e06b 100644
--- a/tycho-p2-repository-plugin/src/main/java/org/eclipse/tycho/plugins/p2/repository/AssembleRepositoryMojo.java
+++ b/tycho-p2-repository-plugin/src/main/java/org/eclipse/tycho/plugins/p2/repository/AssembleRepositoryMojo.java
@@ -45,6 +45,7 @@
 import org.eclipse.tycho.p2.tools.RepositoryReference;
 import org.eclipse.tycho.p2.tools.RepositoryReferences;
 import org.eclipse.tycho.p2.tools.mirroring.facade.MirrorApplicationService;
+import org.eclipse.tycho.p2resolver.TargetDefinitionVariableResolver;
 import org.eclipse.tycho.p2tools.RepositoryReferenceTool;
 import org.eclipse.tycho.targetplatform.TargetDefinition.InstallableUnitLocation;
 
@@ -307,8 +308,12 @@ public static class RepositoryReferenceFilter {
     @Component
     MirrorApplicationService mirrorApp;
 
+    @Component
+    private TargetDefinitionVariableResolver varResolver;
+
     @Component(role = TychoProject.class, hint = PackagingType.TYPE_ECLIPSE_REPOSITORY)
     private EclipseRepositoryProject eclipseRepositoryProject;
+
     @Component
     private FileLockService fileLockService;
 
@@ -350,8 +355,8 @@ public void execute() throws MojoExecutionException, MojoFailureException {
                         .flatMap(tpFile -> tpFile.getLocations().stream())
                         .filter(InstallableUnitLocation.class::isInstance).map(InstallableUnitLocation.class::cast)
                         .flatMap(iu -> iu.getRepositories().stream())
-                        .filter(iuRepo -> autoReferencesFilter.test(iuRepo.getLocation()))
-                        .map(iuRepo -> new RepositoryReference(null, iuRepo.getLocation(), true))
+                        .map(iuRepo -> varResolver.resolve(iuRepo.getLocation())).filter(autoReferencesFilter)
+                        .map(location -> new RepositoryReference(null, location, true))
                         .forEach(autoRepositoryRefeferences::add);
             }
             DestinationRepositoryDescriptor destinationRepoDescriptor = new DestinationRepositoryDescriptor(destination,