The Underground Realms is a magical world underground where princess Moanna, her father, her mother, pan, the fairies and the people of the underground realms kingdom live. The underground realms have miniature houses and buildings that are blue on the outside and inside the miniature houses and buildings its bigger than the outside of the miniature houses and buildings. The people and the magical creatures in the underground realms are smaller in size in the underground realms and in the houses and buildings the people are bigger in size. There is no lies or pain in the underground realms. The underground realms has been around for a long long time underground. The Underground Realms is first seen in the beginning of Pan's Labyrinth and you can clearly see princess mManna running on one of the blue buildings and onto a ledge and into the labyrinth and into the real world where Ofelia was born and lives until her death when she was only 12 years old of age. The Underground Realms is also hidden from the real world because it's located underground where nobody can see it or get to it because when you go down the steps of the center of the labyrinth there's not a entrance for someone to get to the underground realms. Did you also notice that princess Moanna when going up the stairs of the underground realms to the real world she has a ability to run on nothing sometimes when you would be thinking she would have to run on stairs to be able to get to where she was going to the real world.
Also note that none of this really exists. It's just a made up world to help Ofelia cope with first the loss of her father, then of her mother, and so on. We know this is true because of at the end of the movie she is talking with the faun but then when Captain Vidal sees her there is no faun there. The faun is a figment of her imagination, and so is the underground relm and the rest of the magic in this movie. This whole film is, essentially, documenting the young girl's trauma response which caused her to live in a made up world and conincidences to seem like magic, etc..
