An important property of language is that it can be used exophorically, for instance in referring to entities in the extra-linguistic context of a conversation using demonstratives such as “this” and “that”. Despite large-scale cross-linguistic descriptions of demonstrative systems, the mechanisms underlying the comprehension of such referential acts are poorly understood. Therefore, we investigated the neural mechanisms underlying demonstrative comprehension in situated contexts. Twenty-three participants were presented on a computer screen with pictures containing a speaker and two similar objects. One of the objects was close to the speaker, whereas the other was either distal from the speaker but optically close to the participant (“sagittal orientation”), or distal from both (“lateral orientation”). The speaker pointed to one object, and participants heard sentences spoken by the speaker containing a proximal (“this”) or distal (“that”) demonstrative, and a correct or incorrect noun-label (i.e., a semantic violation). EEG was recorded continuously and time-locked to the onset of demonstratives and nouns. Semantic violations on the noun-label yielded a significant, wide-spread N400 effect, regardless of the objects’ orientation. Comparing the comprehension of proximal to distal demonstratives in the sagittal orientation yielded a similar N400 effect, both for the close and the far referent. Interestingly, no demonstrative effect was found when objects were oriented laterally. Our findings suggest a similar time-course for demonstrative and noun-label processing. However, the comprehension of demonstratives depends on the spatial orientation of potential referents, whereas noun-label comprehension does not. These findings reveal new insights about the mechanisms underlying everyday demonstrative comprehension.