How can I get around the limitation in Tycho 0.18.0 that it is not possible to use a directory in my target platform? I can't access the internet so I need have my repository in local file system.
You can use artifacts in the local file system - they just have to be in a p2 repository format. (Background: Tycho requires p2 metadata for the build, and the folders used for the target file location type "Directory" don't contain p2 metadata.)
Once you have a p2 repository locally, you can for example reference it from a target file with a "Software Site" location and a file: URL.
If you are only temporarily disconnected from the internet, you don't need a special setup to work offline. Instead, you can just run your build once while offline, and then activate the offline mode via the -o Maven command line switch. Tycho will then simply use the artifacts it has cached in the local Maven repository.